It’s no secret that the mortgage loan process and procedural policies have become more stringent in the last several years. Of course we know that the tightening regulations are a direct result of the foreclosure crisis. Increased scrutiny is placed on a borrower’s financial records to ensure the borrower is not only qualified based on credit score requirements but to ensure that the guidelines for the different loan products, especially those insured or backed by the government, are followed. FHA and VA are two specific products where sourcing the borrower’s funds is part of the loan approval process.
When we speak of “sourcing funds” we are talking about an accounting and origin of the borrower’s cash on hand. That includes the money needed for any down payment requirements. FHA loans, for example, require a minimum of 3.5 percent of the total purchase price as a down payment. There are a couple of FHA loan products that are exempt from this requirement such as when purchasing a HUD-owned home. For the most part, the 3.5 percent minimum investment is required for FHA loan products.
That down payment can come in the form of “gift funds” from a friend, or in most cases, a family member. Both the borrower and the benefactor will be asked to sign affidavits confirming that the funds are in fact a gift and not a loan.
The lender will also typically ask for proof of funds from the benefactor in addition to the affidavit, or as it’s commonly known, the “gift letter.” The proof of funds is usually provided in the form of a bank statement that reflects the money was in the benefactor’s account prior to making the gift and that it wasn’t borrowed from some other source. The borrower will also have to show a deposit entry on his or her bank statement for the exact amount of the gift.
It’s always important to understand the requirements of the loan product that’s best suited for your purchase. Make sure the lender explains each guideline thoroughly. If you don’t understand something, ask questions. Ignorance is never an excuse and failing to disclose a financial obligation or not being able to properly demonstrate the source of your funds could result in a transaction not closing on time or in extreme cases, not at all.
iDeal Real Estate Professionals LLC is owned and operated by Brandon Bramlett and C. Mark Willix and is affiliated with Maximum One Realty Greater Atlanta. For personalized service, visit us at www.idealrealestateprofessionals.com. You can also email us at firstname.lastname@example.org.