Dennis' Mortgage Blog

Question of the week:  We are using a gift from our parents to purchase our home, can we just put their check in the bank?

Answer:   I answer this question about once a year.  One of the primary obstacles we have faced in the past few years to loan approvals has been verification of funds for closing; specifically not properly documenting gift funds from relatives.  While it is common sense to think, “hey they want to give me money why can’t I just take it and put it in the bank? What does the bank care?”  They do care and we have seen transactions delayed and relationships strained as we try to get the proper documentation of gift funds.

There are two steps to this equation:  first the underwriting requirements when gift funds are involved and second the actual documentation required for gift funds to be accepted by underwriting:

Guidelines:   Fannie Mae and Freddie Mac allow gift funds for all transactions.  However, unless the gift is equal to 20% or more of the purchase price the buyers must show they are bringing 5% or more to closing.  If we have a $400,000 home, and the parents gift $80,000, no issues as we have 20% of the purchase price in a gift.  If the parents gift $40,000 for a 10% down payment then we must show the borrowers bringing 5%, or $20,000 to escrow for down/closing.  So less than 20% gift then must have 5% from borrower.

FHA has no minimum requirement for the borrower.  If parents, or relatives, want to gift all the funds needed for down payment and closing costs that is permissible.  Some lenders however have instituted what are known as “layovers” or tighter guidelines when gift funds are involved in a FHA transaction.  If you have a transaction with FHA financing and a gift make sure you check to see if there are limitations on income to debt ratios or other underwriting guidelines.

Documentation: The transfer of gift funds must be carefully documented to prove the funds deposited into your account constitute a gift and that you have not borrowed the funds from another source and therefore will have a payment the lender would need to show a payment for in income to debt calculations.  The documentation is very simple:

·        Name, address, phone number and relationship of donor on application under the assets section

·        Proof the donor has the ability to provide the gift, i.e. copy of bank statement with donor’s name on it

·        Evidence of the transfer: copy of check from parents, wire confirmation, transfer if you both have the same institution (i.e. credit union account to credit union account)

·        Evidence funds have been deposited into your account

Note on cashier’s checks.  We used to be able to use a cashier’s check as evidence of ability to give the gift and by pass the copy of the donor’s bank statement.  Most lenders will no longer accept the cashier’s check as proof unless the bank provides a letter stating the cashier’s check was purchased with funds from the donor’s account.  The purpose is so someone can’t take cash, buy the cashier’s check and type the donor’s name on it as purchaser.

Keep in mind gift funds do not only apply to purchase transactions.  In this market environment we have also had gift funds involved in refinance transactions to pay down principle balances, pay closing costs or bring taxes current.  These funds need to be documented the same as on a purchase.

If there are any unusual or extraordinary deposits into your account the deposit will need to be documented.  If they cannot be documented the funds will not be given credit in your transaction, and you may be declined from an underwriter who suspects a cash advance on a credit card or the funds are borrowed. We have had delays for many different deposits over the years that are perfectly legitimate, but needed to prove it: winnings from Las Vegas deposited into account, brother or sister paying off a loan made several years earlier, inheritance, lottery winnings, under the table bonuses from employer.  Several years ago I had a client who made a very large, five figure, deposit into the bank.  It was his refunds from the IRS and state from his tax returns.  He did not copy the checks before putting them in the bank.  Underwriter called for his tax returns on a stated income loan to verify the deposit.  His write offs were so great they resulted in the large refunds, and also lowered his qualifying income such that he did not qualify for the loan he applied for.  Lesson: if there is a large and unusual deposit into your account plan on having to document it.  Photocopy everything before you put the funds in the bank.

As I said at the top, documenting assets is one of the primary obstacles we face in finalizing loan approvals and closing transactions.  If you are considering a purchase or refinance transaction in the near future and have some funds to deposit that are not part of your normal salary and compensation call me to ensure you have the funds properly documented.

Have a question for me?  Ask me!

FHA originations in January were almost $27 billion dollars, with 40% of the applications being refinances.  FHA loan volume is at all time highs.  Going from about 2-3% of the total mortgage volume a few years ago to 32% of the national mortgage market.  Along with the increase in fundings is an increase in foreclosures.  For the period October 2009 through January 2010 FHA foreclosures were 42% higher than the same period a year earlier.  Unfortunately the increase in foreclosures due to increased volumes has had a very negative impact on FHA mortgages going forward with increased mortgage insurance premiums and possibly/probably down payment requirements.

Not data but words had a big impact this week.  On Tuesday the Federal Reserve Open Market Committee met and announced it was not changing the Fed Funds rate.  Further, the Fed was sticking by its statement that rates would remain “exceptionally low for an extended period of time.”  Not all the Fed governors agree with this statement, but enough of a majority do to leave it intact for now.  Finally, the Fed reiterated it is ending its mortgage purchase program as scheduled March 31^st after having purchased $1.25 Trillion in Mortgage Backed Securities (MBS). 

So far the MBS market has shrugged off the pending end of the Fed in the market.  Rates have not been rising in anticipation of the huge void in buyers where the Fed has resided for the past year and more.  Perhaps the unlimited losses coverage the Treasury is giving Fannie Mae and Freddie Mac takes that seat at the table?  My answer is “Yes.”

In economic data this week inflation is tame with both PPI on the production side of the economy and CPI on the consumer side were pretty much flat in February.  With the numbers supporting the Fed statement regarding rates remaining low there was no real news to jolt the market. 

Nationally refinances still lead the way.  In its weekly application survey the Mortgage Bankers Association announcement showed refinance applications remain over 67% of total mortgage application volume—a level that has been consistent for over a year.  With initial unemployment claims at 457,000 last week we can count on the refinance volume to stay well ahead of purchase volume until the initial claims numbers drop significantly.

Looking ahead to next week there are no economic releases that have huge impacts on the MBS market.  We will get numbers for existing and new home sales, consumer confidence and 4^th quarter GDP.  Mortgage backs will take their cue mostly from stocks, which could take their direction from the political battle in Washington over health care.  As a prelude, this morning as Democrats appear to be closer to having the majority needed in the House to pass the Senate bill stocks have dropped and mortgages have benefited. 

Rates continue their string of flat Friday’s with no change from last week.

Rates for Friday March 19, 2010:

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.75%                              No Change

30 year conforming-jumbo 5.00%                     No Change

30 year FHA    4.75%                                      No Change

30 year FHA jumbo 4.875%                            No Change

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

A lot of Americans who may not have paid much attention before are getting pretty detailed lessons in civics, politics and government.  Each of our votes matters and our elected officials mirror the care, concern and importance all Americans put in their right to vote and elect those officials.

Have a great weekend, let me know how I can be of service to you,

Dennis