What's "Acceptable" and "Unacceptable"
to an Underwriter? Part 1 ...
Last week, I wrote a post entitled, "Hansel and Gretel were the original participants of "Survivor". In that post I related that pre-planning and preparation were key to Hansel and his sister getting back home safely and alive ... and drew the parallel to modern-day mortgage processing.
My point was ... pre-planning and preparation prior to entry and application for mortgage financing would more safely and quickly deliver you through your mortgage process into becoming successful home buyers. Keeping good records and proper documentation of finances was stressed throughout the post.
My post gave rise to some good questions from readers. Questions regarding what is viewed by an Underwriter as "acceptable" and "un-acceptable" when it comes to monetary deposits of funds and "verifiable" accounts.
In this article and a Part 2 follow-up, I will address and try to clarify what IS and what is NOT acceptable to Underwriters. My hope is that you will see the examples of each, come to better understand what will be asked of you, and be better prepared for your own future mortgage processing because of it.
One of the most common questions I hear from clients is ...
"Why do I have to explain a late payment, the reason for a collection, or the reason for a prior bankruptcy?"
The answer? The response you give to these questions helps an Underwriter fully understand the credit issues you faced in the past. It also helps them better understand and judge if the issues might surface again in the future. And what the level of risk of lending to you might be at this time.
Recent inquiries on your Credit Report that occurred within recent months could signal to an Underwriter that you have taken out new debt ... new debt that does not yet appear as such on your credit report. New debt can impact ratios known as DTI (Debt-to-Income) and cause those ratios to exceed the approvable levels for your mortgage financing.
Why does an Underwriter care where the money for down payment comes from?
Down payment funds are rated as "acceptable" or "unacceptable" in the Mortgage Industry. Cash ... can be an example of unacceptable. Ironic, isn't it?
But cash can be deemed acceptable if it is a gift ... and that gift of cash is properly documented as such. Funds from a Bank checking account, savings account, or CD are the most routinely seen forms of properly documented and acceptable cash gifts. Again I point out, it's all about documentation and having the "paper trail" that I referred to within my Hansel and Gretel post.
Any Borrower should be prepared to fully-document their cash gift "paper trail" ... as should the person(s) that provided the gift. They too may be asked for verifiable proof or documentation of the funds/gift/an account.
Underwriters want to make sure that there is no loan agreement being made between the "giftor" and "giftee" regarding the cash received. That you, as a new Borrower, will not be liable for additional payments or payback of any monies that would disrupt or exceed your DTI (Debt-to-Income) ratios.
Some clients think this is overkill and possibly even an invasion of privacy as it pertains to the party acting as the "giftor". And sometimes I agree the requests for documentation get a little "neurotic" in nature. But the hard cold truth is, Underwriters will win all arguments regarding this matter.
The faster and more thoroughly we respond to their requests for proof and documentation, the faster we will proceed towards the approval needed and Closing. So you and the party providing the cash gift must be prepared to fully comply to their underwriting requests.
In the next segment of my post, I will address "why an Underwriter cares about large deposits or unexplained deposits made" to your account ... and answer questions regarding "Earnest Money and down payment".
* Work with an experienced, knowledgeable Mortgage Lender willing to take the time to answer your questions and assist you through every step of your mortgage process. Contact me today ... and I'll put my 35+ years of mortgage experience and expertise to work for your benefit.
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