Closing costs calculator: tracking your funds for closing

December 14th, 2010

It seems pretty simple. Use the closing costs calculator to determine how much money it will cost you to purchase your new home. Use the prequalification calculator to determine how much new home you can afford. Find your home, write an offer, get your mortgage and bring your money to closing. Get your keys.

The process between using the mortgage calculators and getting your keys can be a bit tricky--that's the part where your mortgage application is processed and approved by an underwriter. In the underwriting process the underwriter will examine your income to ensure it is constant and likely to continue.

Review the title of your property to ensure that the lender will be the primary lien holder on title. Analyze the appraisal not only for the value but also to determine the property is safe and in good condition. Your assets will be reviewed by the underwriter to ensure you have enough money for your down payment and any closing costs you will pay.

While the amount of funds needed for closing may be very close to the amount shown when you used the closing costs calculator, simply having that much money in your bank account does not mean you will be approved for your loan. The underwriter is going to want to know where the money came from and if it is your money or someone else's.

Down payment requirements

FHA mortgages will allow gift funds from a parent or relative to cover all of your required funds to close, including down payment and any or all closing costs. If you are fortunate enough to have such a gift available, or you are able to have the seller participate in paying closing costs for you, you can purchase a home using FHA financing with none of your own money.

Fannie Mae also allows gifts for down payment and closing costs for buyers of single family primary residences. (Primary residences with two to four units follow Freddie Mac guidelines below.) Similar to FHA, with the right amount of gift and seller participation if needed you can purchase your new home without using any of your own money.

Freddie Mac's guidelines are a bit stricter, and until recently Fannie Mae mirrored the same policy. For Freddie Mac all of your down payment and closing costs can come from a gift as long as the down payment is 20 percent or greater of the purchase price. If you are purchasing with less than 20 percent down and obtaining a gift for part of your closing funds you must contribute 5 percent of your own funds to the closing.

For example if you are purchasing a $250,000 home and getting a mortgage for $200,000 (80 percent loan to value) then all of your down payment and closing costs can be a gift. If you are getting a loan for greater than $200,000 then you will need to bring at least $12,500 (5 percent of the price) to closing.

Gift fund documentation

If you are receiving a gift you simply cannot get a check from Mom and Dad and put it into your bank account and declare "it's a gift." The underwriter will want to verify that the money is a gift and where that gift came from. While the specifics may vary from lender to lender, the standard gift verification items include:

  • Gift letter from donor stating relationship and the funds are a gift to be used to purchase the property
  • Copy of bank statement from donor proving ability to make gift (some lenders will accept copy of wire or cashier's check showing donor purchased as proof)
  • Copy of deposit of funds into your bank account

Your "own funds"

The money is in your account, it's your money. Right? Technically, that is correct, but mortgage-wise not so correct. In verifying your accounts underwriters will want a two-month history on any bank account you are using for funds for closing. Either two months of statements showing all the transactions or a Verification of Deposit (VOD) that shows the current balance and the average balance the prior two years will be used to underwrite your assets.

If there are any large deposits on the transaction history that cannot be traced to your employment the underwriter will require a source of the funds. If the deposit is from another asset account you have, say an investment account, then you will need to provide statements verifying that account and the two-month history. Any "new" money into your accounts will need to be verified as to source and that the funds have been in your account(s) for at least two months.

If a VOD is used to verify your funds and the average balance is significantly lower than the current balance, signifying large deposits in the 60-day period, you will need to verify the source of funds that increased the balance.

Don't get tripped up

Many closings are delayed because of asset verification issues. Just because the results of your closing costs calculator show you will need $29,540 to purchase your new home does not mean you can simply deposit $29,540 into your account from various sources and go to closing. All your funds for closing will need to be accounted for and documented.

Why? So the lender is assured you are not borrowing any funds for purchasing the home beyond the mortgage for which you are applying. If you are borrowing any funds then you will need to source the funds and show documentation as to the monthly payments.

Do not get tripped up at your closing; track your funds for closing with detailed statements and sources of your funds.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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