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Finding Sources of Cash for Down Payment and Closing Costs

Liquid assets, or cash to close, may come from a number of sources. Rules concerning sources of cash to close vary depending on the type of loan and the loan-to-value. FHA and VA are more flexible concerning sources of cash to close. The major agencies, Fannie Mae and Freddie Mac, are very strict about the minimum contribution from the borrower's own funds; at lower LTV ratios, they permit larger amounts from sources other than the borrower's own funds. If you are short of cash to close (you should make this determination long before you ever sign a sales contract), you may be able to improve your position by doing one or more of the following:

• Increase the sales price – Consider that everything in the purchase transaction is negotiable. The amount of money that is net to the seller (how much money the seller gets after all expenses are paid) is the major concern for the seller. You can structure the transaction to meet the mortgage lender's guidelines, increase the loan amount, and reduce your cash out of pocket. Here's how: Offer the seller a higher sales price, and have the seller pay your closing costs. Most mortgage lenders permit sellers to pay discount points, origination fees, buydown fees, and closing costs (except prepaid items, such as odd days' interest, insurance, and taxes) up to 3 percent of the "value" (the lesser of the appraised value or sales price) for loans more than 90-percent LTV and up to 6 percent of “value” for loans with an LTV or 90 percent or less. The seller gets the same net proceeds from the transaction, and you don't spend all your cash at the settlement table. (See Figure 3.3.) The downside is that the house may not appraise for the higher price; if it does, you have a somewhat larger mortgage with somewhat

FIGURE 3.3 Increase the Sales Price to Conserve Cash at Settlement

Increase the Sales Price to Conserve Cash at Settlement

larger monthly payments. If you are marginally qualified on the ratios, this could be detrimental.

• Get a gift – If you have a family member (or religious group, municipality, or nonprofit organization) who is willing to help with closing costs, that person can “give” you the money. A family member generally is defined as a close relative, and the amount that can be given is limited to amounts over the minimum 5-percent (of the sales price) contribution from your own funds unless the LTV ratio is SO percent or less. The donor must sign a letter that specifies the amount and date of the gift; and indicate the donor's name, address, telephone number, and relationship to the borrower; and include a statement that no repayment is expected. A gift can be part of the minimum 5-percent down payment if the relative has lived with you for the previous 12 months and intends to continue to live with you in the new house. The mortgage lender verifies that the donor has the funds available to “give” and that the funds have been transferred into your possession. Under no circumstances can you be given a “gift” by a party to the transaction such as the real estate agent, seller, or builder.

• Get a loan – If you have assets that you do not wish to liquidate, you can borrow against those assets to meet your cash requirements. The key is that the borrowing must be secured. Unsecured loans are not permitted. Consider that repayment of the borrowed funds counts in your ratios and the debt is included in your total debt.

• Have the lender pay some or all of your settlement costs – Many lenders now have programs known as “zero- point” or “zero-cost” loans. Zero-point loans pay all origination fees and discount points by charging a somewhat higher interest rate on the loan. Zero-cost loans pay origination and discount points as well as your closing costs (except prepaid costs). Again, this is accomplished by charging a higher interest rate so that the lender recoups costs over time. There are limitations to this if the lender is affiliated with a party to the transaction (for example, the seller is a builder and the builder owns the mortgage company or the mortgage company is owned by the real estate agent, or agent's company).

• Have your employer pay part of your closing costs – If your employer has a program by which it pays closing costs as an employee benefit, you may use these funds as part of your closing costs.

• Sign up for a Community Homebuyer Program – Both Fannie Mae and Freddie Mac (and many states) are encouraging lenders all over the country to participate in these programs. Special underwriting standards apply to these programs for first-time homebuyers. This permits you to contribute as little as 3 percent of your own cash, and in some cases you can borrow or get a grant for the entire down payment.

• Investigate Community Reinvestment Act (CRA) opportunities – Many banks now are focusing intense efforts to comply with Community Reinvestment Act (CRA) requirements. They are focusing their lending efforts in targeted neighborhoods in an effort to comply with the law. This often means that the mortgage lenders may have special programs in effect with relaxed underwriting standards to increase lending in targeted neighborhoods. Check with your local lenders to see whether this might apply to you.

• Rent with the option to purchase – If you have a signed agreement with the seller, you have rented the property for at least 12 months (and can document it with canceled checks or other means), you can apply the portion of the rent that is above the market rent (as determined by an appraiser) toward the down payment. Be aware that if the appraiser determines that the rent is below market, it then has the opposite effect and is as a sales concession, which is deducted from the price of the house.

• Apply for programs for veterans – You can get a VA-guaranteed loan with 100-percent financing (90-percent financing for cash-out refinances), or you can apply for an FHA-insured loan (through its veterans' purchase program) with as little as $200 out-of-pocket cash.

Resolving Employment History Problems

Salaried employment for the two full years preceding the mortgage application is almost automatically considered unless the company (or industry) in which you work has special difficulties. Several common employment history problems include:

• Employed for less than two full years – If you have been employed for less than two years and you were previously in school or in the military, then provide a copy of your diploma or military discharge papers.

• Gaps or interruptions in employment – Employment gaps or interruptions that extend beyond one month should be addressed in writing. Describe gaps in employment honestly as favorably as possible.

• Frequent job changes – If you change jobs frequently to advance within the same line of work and you are successful in that work, then you should receive favorable consideration. Document your success in changing jobs or careers in a letter to the loan officer. If you do not demonstrate advancement (i.e., increased pay) when you change jobs or move from one line of work to another, however, the lender may view this as a negative, unless you can demonstrate that the changes in jobs were due to industry or economic changes over which you had no control. In fact, you can turn this into a plus by arguing that you were able to maintain your level of income despite widespread economic or industry changes.

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