All Down Payments Are Not Created Equal

Dec 12th, 2007 @ 9:10 AM by MortgageMentor

It is no secret that 100% financing is quickly going the way of dinosaurs in the mortgage market.  As such, many would be buyers are scrambling to figure out how they are going to come up with the cash to qualify for a mortgage.

Many borrowers are fortunate enough to have rich uncles or parents who will give them the money for a down payment.  However, you have to be careful!  Lenders don’t necessarily allow gifts as down payments.  In fact, Fannie Mae underwriting guidelines require the borrower have at least five percent down in the transaction UNLESS the total gift is 20% or more (unless you are doing 100% financing). 

In other words, you can’t use a gift as a down payment with Fannie Mae backed loans unless it is a very big gift.  Freddie Mac on the other hand will allow gifts if the LTV isn’t greater than 80%.  However, gifts are allowed if you take a second mortgage.  This is a slight difference in agency rules, but significant nonetheless in that it means the difference between a loan approval and denial if you don’t know which agency your lender sells their mortgages to.

It is also important you understand “seasoning” of assets.  On full documentation loans, lenders will typically request three month’s of bank statements.  Careful underwriters will also request explanations for any large deposits into your account.  They are looking for seasoning to make sure the money in the account is really yours and not a gift or from an outside investor or undisclosed loan.  This is also one of the reasons we often tell people not to move money around when applying for a mortgage because we will have to document the paper trail.

Good mortgage brokers and loan officers should discuss the source of your down payment with you.  It should be one of the first questions they ask when taking your mortgage application.  If it isn’t, you are probably dealing with a rookie.

As always, it is important as a consumer that you realize that obtaining a mortgage is likely to be the largest financial transaction of your life.  It is important that you take the process seriously and take the time to sit down with your loan officer and really understand your financing options and how banks are viewing your application.