“SHOW ME THE MONEY”  TREASURE HUNTING FOR CLOSING FUNDS

By:  J. Garner, Mortgage Loan Officer
Evolve Bank and Trust
www.mortgageloansblog.com

 “Jerry McGuire” was a 1996 award winning film with the resounding catch phrase, “Show me the money!”  Lenders have been repeating this to their borrowers for years.   Where can borrowers go to find money when they do not have it to show?

Three areas to search are the borrower’s forgotten assets, gifts from family or employers and move-in costs paid by third parties. Sinking a shovel into these three areas has turned up pay dirt in the past. Here is a treasure hunting map detailing some clues.

Gift From Family:   Gifts can come from family members or employers.  The amount of the donation varies according to different loan programs.  The donor will be required to document the source of his funds and that the money is a gift to the donee not requiring repayment. If the family member giving the money does not want to cash in a certificate of deposit or stock fund, he can borrow against the asset to give to the donee.

Borrower’s Forgotten Assets:  Whole life insurance policies or annuities may have a cash value that can be borrowed. Many times the borrower does not realize the insurance she purchased years ago has a cash value that can be borrowed to pay the move-in costs.

Loans secured on certificates of deposit, stocks and bonds, and durable assets such as cars can be used as acceptable sources of funds to close as long as the loan is secured on an asset owned by the borrower. The payment must be added into the debt-to-income ratios for qualifying purposes.

IRAs, 401(k)s and Retirement Funds.  There can be heavy financial penalties for pulling money from these sources.  However, many companies allow the homebuyer to borrow against these assets with no penalty.  The repayment terms may be calculated in the borrower’s debt-to-income ratio.

Sale or Cash Out Refinance of Existing Real Estate Property can generate needed funds to close on another property. Lenders will require the HUD 1 Settlement Statement or sufficient proof of the source of funds.

Tax Refunds can provide a surprising source of closing funds.

Move-In Costs Paid By Third Parties:  Sellers are as motivated to sell a house as the buyer is to purchase.  Sellers can pay up to 3% of the sales price toward the buyer’s costs if the borrower is getting a conventional loan above 90% loan-to-value. If the loan-to-value is 90%, the seller is allowed to pay costs up to 6% of the sales price or value whichever is less.

On certain loans, the sellers are allowed to pay more and even loan the borrower the equity on a second mortgage. Investor loans allow the sellers to pay no more than 2% no matter how much money the investor pays down.

FHA loans allow the seller to pay up to 6% of the price toward the buyer’s closing costs and prepaid taxes and insurance.

Lenders are motivated to close the transaction and sometimes can bump up the interest rate slightly in order to use “premium pricing” to pay the borrower’s prepaid taxes and insurance or some of the closing costs. In most cases the rate is increased .25% and the difference in the monthly payment is minimal.

Government agencies such as Tennessee Housing Development Agency have programs that provide down payment assistance to borrowers. Some of the well known programs are City of Memphis Down Payment Assistance, Shelby County Down Payment Assistance, United Housing, Inc. Rural Housing, Mississippi Bond money, H.E.L.P.  For the down payment assistance grants and loans, the borrower is required to meet a minimum or maximum annual income guideline and sometimes are required to be first time homebuyers.  First time homebuyers are defined as buyers who have not owned real estate in the last 2 to 3 years.