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Source of Cash for Down Payment and Settlement Costs

The fourth question that lenders must ask is “Do you have enough money to close the sale and where are you getting it?” (This does not usually apply to refinancing.) Lenders require verification of deposits, gift letters, and other written evidence of funds available for settlement. These are necessary because of past frauds in which sellers or real estate agents loaned money to buyers “under the table” to facilitate a higher selling price or to circumvent lenders' qualification standards. Some lenders even require home- buyers to disclose where they got the money for the deposit required to bind their sales contract. This is especially true for borrowers who have very little cash on hand or if there have been large deposits to their bank accounts within the last few months.

Employment History

The two largest causes of mortgage foreclosure are divorce and unemployment. A lender cannot anticipate divorce, but employment history is reviewed. The final question that a lender must ask is “Will your future income be stable enough to meet monthly mortgage payments?”

The ideal employment history from a lender's perspective is several years of employment with a well-known, prosperous company, or a few job changes with increases in salary and responsibility. A lender may require a borrower with a spotty employment history to give an oral or written explanation. Usually, employment history affects a lender's decision only when there are other problems with the application, such as a bad credit report or tight qualification ratios. Conversely, an excellent employment history – stability, promotions, and raises – often can overcome tight qualification ratios.

What If There Is a Skeleton in the Closet?

One-third to one-half of all mortgage loan applications do not precisely fit the guidelines described in this chapter. Nevertheless, more than 90 percent of mortgage loan applications are approved. An application can be turned down for a variety of reasons:

• Not enough income to support the loan payments or too much outstanding debt already

• Past credit problems

• An undesirable property or low appraisal value

• Insufficient cash to close

• Poor or limited employment history

Although some things are outside of your control, the best advice is “Before applying, do everything you can to make sure that your application will be approved.”

If after reading this chapter, you are confident that your income, assets, credit history, and employment history fall well within national qualification guidelines, go on to Chapter 4. If not, or if you have a skeleton in the closet, Chapter 3 provides useful techniques to help you overcome qualification problems. Think of these as “skeleton keys." Few qualification problems cannot be solved if they are addressed early enough in the application process.

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