Home Buyers: Don’t Move Your Money!

account closed If you plan to apply for a home loan within the next three months, do not move your money around. Here are three tips:

• Don’t consolidate bank accounts.

• Don’t close a bank account.

• Don’t open a new account at a new bank.

If you want an easier, smoother loan closing, just leave your money as it is. Here’s why.

Right now, underwriting guidelines are super strict. Underwriters are expected to triple-verify everything. They want ironclad proof that down payment money and reserves (money in savings) are your own, not borrowed. In the past, borrowers who did not have enough cash to qualify for the home they wanted, used trickery to get qualified. They borrowed money from friends, took out cash advances on credit cards, or magically made cash appear from God-knows-where. There are tales of cash coming from drug sales, lap dances, and dumpster diving. I even heard a story from a loan officer friend about cash for the down payment coming from a giant garbage bag hidden in the kitchen. (He was visiting the home to take a loan application when the client showed him a hundred grand in bills in a big, black bag that was under the sink.)

Underwriters do not like what’s called “mattress money.” Why? Because money you pulled out from under your mattress might have actually been a secret side loan that has now pushed your debt-to-income ratio too high.

All down payment money must have a clear, proven, verified paper trail showing the money is and has been your own. Therefore, you are required to submit two months’ bank statements verifying the funds. If the bank statement shows a large deposit coming from a different bank account, that is a problem. Now you have to provide two months’ bank statements for that account. If you have shut down or opened new accounts, this gets complicated.

The last thing you want is complicated! Complications add more paperwork, more letters of explanation, more underwriting supervisors getting involved, more time to get your final approval, more time to close, and more headaches for you.

I’ve had clients who thought they were simplifying things by consolidating their accounts right before applying for a mortgage, but they ended up doing just the opposite. I’ve also had clients move large sums from investments to checking accounts in order to “get ready” to buy a house. Don’t do that. Leave your funds where they are and then ask your loan officer how to best transfer your down payment to the closing agent.

You might have a bank account in another state that requires three-days’ notice to move the money. This is okay. You will move the money and paper trail it, according to your loan officer’s instructions, at the appropriate time — not right before getting your pre-approval.

The exception to the above is if you will not be buying a house for at least four months. In that case, you have time to move your money, because you don’t have to show bank statements from that far back.

If you have any questions about this, please let me know. My goal is to help you have a pleasant, stress-free loan experience. When you are well-qualified and do everything according to the (underwriting) book, then it is possible to have a good finance experience–even now.

Do Lenders Really Need All This Documentation?

I received an email asking a question that a lot of folks are wondering about: “Do I really have to give my lender all this personal documentation?”

Included in the message was the list her loan officer had provided:

* W-2s from the last two years

* Current pay stubs to cover one month pay

* 1040 tax returns, all schedules, all pages, for the last two years

* Two months’ statements, all pages, for all accounts: checking, savings, investment, retirement

* Photo ID

Not only is it a lot of work to photocopy or scan all these pages, but it can seem a little invasive. People wonder why they need to look into every nook and cranny of their financial lives, especially when they have excellent credit and are putting down 20% or more.

Prior to the mortgage meltdown, the only documentation lenders asked for was the W-2 and a pay stub, and confirmation of the down payment. Tax returns were never asked for if you could show your income with a W2 statement. So now, the long list seems over-the-top.

Unfortunately, the answer is that both Fannie Mae and Freddie Mac are requiring triple the documentation that they did before. It’s not your loan officer that is being difficult, it is the new underwriting guidelines. And, it doesn’t stop there!

Just wait until the underwriter reads your credit report. It’s likely you’ll be asked for a Letter of Explanation about all those previous addresses. They want to a signed confirmation that you don’t own other properties they’re not aware of. And if your credit report shows you have a little mom-and-pop side business — such as an online business selling tee-shirts — you’ll have to document and write letters about that, too.

Then when the underwriter reads your bank statements, you might be asked for more letters. They’ll want to know why you have a deposit in the amount of $200 going into your checking account. Where did that $200 come from? Clearly it wasn’t a deposit from your paycheck, which would have been much larger. They want to know if it was a birthday check from grandma or cash from selling marijuana. I know, it’s ludicrous, right?

Welcome to the new rules of underwriting. Everything must be documented, preferably at least three different ways. And since the lender is the one holding the money you wish to borrow, they make the rules.

I spoke to a gentleman who said all the paperwork was “stupid” and that he knew they really didn’t need it. This was based on the last time he got a mortgage, over ten years ago. He decided to take control of the situation, so he told his loan officer, “You don’t need all that and I’m not doing it.” He knew he’d win. After all, he had perfect credit and a good down payment. He knew he was the ideal customer and that there was no way his bank was going to let him go.

Was he in for a surprise! They were more than happy to let him go. Without ALL of the documentation asked for, he was not going to get approved, final answer.

What do you think about all the paperwork and letters that are required to go into a loan file now? Have they gone too far? Or is this what they should have been doing all along? (To comment, see the top of this article.)