Sources of Closing Funds

On By Greg Milestone

The following advice prevents horror stories.

One requirement for mortgage approval demands more precision than any other, and is also more surprising toborrowers than any other-

WE MUST PROVE WHERE YOUR CLOSING MONEY HAS BEEN IN THE LAST 90 DAYS, ANDTRACK IT ALL THE WAY TO THE CLOSING TABLE.

Any large deposit, transfer, or new account openedin the 90 days before loan application will be challenged.

The purpose of this strange and insulting exercise is to demonstrate that you have not secretly borrowed yourdown payment — an incredible proposition to most borrowers, but all too common. The only way to prove thatyour money is really your money (!) is to prove that it has been in your accounts for 90 days.

GIFTS

Gifts from family (only) are allowed (some wrinkles- check with us). All lenders require an original gift lettersigned by the donor stating (1) the donor’s relationship to the recipient, (2) the amount, (3) that it is anirrevocable gift, and (4) the donor’s address.

“As your Dad, I’m delighted to give you $13,000 to help you buy a house, and you don’t need to pay the moneyback.” That one sentence, plus an address, is an acceptable gift letter because it includes all four components (wealso have form letters).

Necessary documents for gifts:

  1. The ORIGINAL gift letter, and
  2. The money (this is the crazy part….)

NEVER (please) use a PERSONAL CHECK to move gift money. If you do, we must find the canceled checkat the donor’s bank, and your closing may be delayed for several years. (Exception- FHA and VA, where they arealways OK.)

DO ask the donor for a certified check made payable to the title insurance company handling the closing, or toyou. DON’T DEPOSIT the check! Send us a copy, and just bring the check to the closing.

OR (inferior, but workable) wire the gift funds to your bank or to the title company, and send uscopies of both the sending and receiving wire receipts.We will spend any amount of time necessary on the frontend to rehearse a gift plan with you and your donor.

CONSOLIDATING OR TRANSFERRING MONEY, OR LIQUIDATING INVESTMENTS, ORBORROWING YOUR DOWN PAYMENT

In the ninety days prior to buying a house, try not to transfer money from institution-to-institution (internaltransfers, say savings-to-checking are rarely a problem). If you have done so before being warned, please beginto assemble a paper trail to recreate the transfers.

In that same 90-day interval, save all bank, mutual fund, brokerage (whatever) statements (all pages) for accountswhich will be used for down payment and closing funds. While not always true, you should assume all lenderswill require three monthly or two quarterly statements for all such accounts.

Once you are under contract to buy (preferably before), we will spend any amount of time with you to develop aplan to get your closing funds to the closing table. This money must be presented at closing by certified (also”guaranteed” and “cashier’s”) check, or sent by wire.

Liquidation of stocks, bonds, mutual funds, or money market accounts, or bank-to-bank transfers areopportunities for disaster. We must have (1) evidence of sale of the asset (a trade confirmation), and (2) proof offunds transfer.

Other than for earnest money, DON’T MOVE MONEY WITH PERSONAL OR MONEY MARKETCHECKS (please). If you do, we have to have a copy of the canceled check, and finding it may delay yourclosing for several years.

Instead, while collecting closing funds at a bank or credit union:

  • Ask your broker/mutual fund to send you THEIR check, and give us a copy of the check and your depositreceipt. These firms will NOT issue certified checks acceptable at closing.
  • Or, wire funds to your bank, or directly to the title company, and give us copies of the sending AND receivingwire receipts

As you may have guessed, it’s a good idea to accomplish these transfers a couple of weeks before closing. If youintend to sell any physical property to raise closing funds (cars, jewelry, art, gold coins, boats….), it can work, butcheck with us early in the process.

Inheritances- if you are named in the will, the money is your money. However, if the inheritance came to youthrough a named parent or relative, it’s a gift requiring the gift paper trail on page one.

Disbursements or bonuses from a company you own are rarely acceptable unless they show on a prior year taxreturn. Lenders’ fig leaf of concern here- worry that a borrower will strip too much working capital from a firm.

Joint accounts with people not a party to your loan will require acknowledgment from the joint account holderthat the money is really your money. If the joint partner is not family, we’ll need a good explanation of thearrangement signed by you and the joint holder. “Cash,” in the sense of folding greenbacks, will not be approved by any lender for closing use, if for no otherreason than no title company will accept cash at closing. Cash should be deposited in a bank at least 90 daysbefore signing a purchase contract.

If you intend to BORROW to raise and portion of down payment or closing funds-

1. Unsecured loans — personal, credit card advance, line of credit, even from family — are not acceptable.

2. The following secured loans are acceptable, but you must qualify for the monthly payment in your underwriting ratios (we, know, we know… even though it’s your money)-

  • Bridge loans secured by other real estate.
  • Loans from financial institutions secured by an asset with a demonstrated value and title (car, boat…).
  • 401k or other loans secured by retirement accounts.
  • Insurance policy loans.
  • Family or other private party (seller?) second mortgages, if documented by note and deed of trust, and not in excess of loan-to-value guideline (usually total loans cannot exceed 90% of purchase price).

3. These loans are acceptable, and do NOT count in ratios (Please do not ask why. We don’t know.)-

  • Margin loans.

4. Loans to you from a business you own ought to work, but don’t.

5. “Equity advances” from corporate buyouts are very tricky. Okay if the relo company takes responsibility forthe house; troublesome if the advance looks like a loan you might have to pay back if the house doesn’t sell.

IN ALL CASES OF BORROWED CLOSING FUNDS, WE MUST HAVE A COPY OF THE NOTESHOWING REPAYMENT TERMS, AND A FUNDS TRANSFER PAPER TRAIL (as above).