January 5th, 2015 1:21 PM by Diego Quintero
So, here’s the story of Jim, a man who needs a few bucks from his parents in order to buy a house.
Let’s give you some background. Because he is paid mostly in tips, his banking practices are not really typical of someone who makes a steady paycheck. He makes random withdrawals & deposits of cash into his accounts.
Jim has filed income tax returns for at least the last two years though! That’s good news because he’s properly reporting his earnings in order to prove he makes some money.
The taxes show that he has been self-employed. Instead of a W-2, he receives a 1099 each year from various companies and people. His schedule C shows profitability! We might actually be able to calculate his income!
Let’s talk figures now...He makes $3,900 per month, or $46,800 annually. His monthly credit card, car payments, and student loans equate to a $600 monthly expense. As it stands his debt to income ratio is about 15.3%.
Using an FHA mortgage, he might be allowed to have as high as a 55% debt to income ratio and still get a loan approval. So, this leaves about $1548.30 for his mortgage expenses, including taxes, insurance, mortgage insurance, and any homeowner’s association fees (note the spending power).
After three trips and fifteen viewings, Jim found his perfect home! Within a few days of obtaining his loan approval and his verbal promise that his parents would give him some loot, he was already into contract on his first home ever. Dream come true!
So, we get into the process of working on his bank statements to prove that he earns a proper income and isn’t depositing ‘funny money.’ Cash deposits are terrible for mortgage finance. It’s way too hard to prove where it comes from or if the cash always belonged to him, like in the form of an “I-O-U” with his buddy, Louie.
This process that mortgage brokers and bankers go through is called “sourcing and seasoning funds.” Using the prior two months of bank statements, the focus is on steady deposits. If we can also pinpoint where every penny comes from in those two months, then you are good to go. At any time, however, a bank might ask for the last 12 months of statements to make a deal come together. You never know, but it’s not typical!
In Jim’s case, we completely eliminated the use of the one account riddled with cash deposits. We are able to use his untouched $60-balance, checking account that hasn’t been touched since 2009. But that’s not enough to make it happen, right? Of course not.
This is where the ‘rents come in! That’s right, Big Daddy and Big Momma!
Turns out, they also made one small cash deposit. Plus, dad sold a boat for a cool $1500 but they had the bill of sale and a copy of the check and it was easy to show where it came from. Let that be a lesson to all of you, create a “bill of sale” when you sell those larger items.
There was no hardship in providing the gift. The balance was high enough and the money was easily traceable as it was all typical earnings from employment. So all we had to show was the current statement, the copy of the check from dad’s account, and an online screenshot of the account balance decreasing by the check funds being “gifted.”
Enter “prideful” Jim, who showed a 60-day transaction history with the new balance in the account, ordered a cashier’s check for the amount required at the closing, and signed on the dotted line (about 80 times). Congratulations Jim, you’re a homeowner!
With enough money to cover his down payment of 3.5% of the purchase price, and the seller agreeing to pay up to 6% of his closing costs, Jim bought a house for nothing (well, his folks’ money counts for quite a bit - but you get my drift).
The moral of the story is - have realistic expectations on the home-buying side and be organized! Your industry professional can help you understand the process and help to organize you in a way to make your experience as easy as Jim’s.
This is the typical scenario for those young people getting out of college and entering the workforce. At the onset, he had no idea that the process - in retrospect, was actually easy. It was just a matter of being a little organized and having real expectations on the home buying side.
As a professional or a consumer, would you have any recommendations for Jim or his family?
Your Trusted Mortgage Broker,
Diego L. Quintero