A Breakdown of the Purchase Funds Required for Your Home Purchase — and Alternatives and Options

 

In addition to the elements of the closing costs, this article provides additional tips and guides about the funds you will need when you buy your home:

• Source and documentation
• Closing costs alternatives
• Preparation worksheet

The homebuyer must document sufficient, acceptable and verified funds to cover all of these expenses, as well as any reserve requirements that the loan program entails.

If all this frightens you away from buying a home, relax.  There are always alternative methods for reducing and sometimes eliminating these requirements, which are discussed below.

Source & Documentation

The lender will require sufficient verification, documentation and final confirmation of any funds that will be used to satisfy the funding requirements listed above.

Essentially, you are required to prove that the purchase you will be using funds are already in your possession — and that the source of those funds is acceptable to the lender.

Why do they want this?  This requirement helps the mortgage lender confirm that you did not borrow the funds from a non-allowed source and incur additional debts.  If you did borrow the funds, then the liability payments must be included in your debt-to-income qualifications.

Bank statements are the most common method of documenting the existence of funds.  Many lenders will often supplement this with a verification of deposit (VOD) request form that is completed by the applicant’s bank.

Most lenders require that the funds are “seasoned,” or actually have been in the applicant’s possession for at least three months.  To accomplish this, the lender will normally request two to three months of bank statements.  If the lender sees a low average balance with a sudden increase, it will become suspicious and request further verification of the source of those additional deposits.

The bottom line is that lenders want to ensure that the funds do not come from an unreported income or from additional debt.  Unreported income invites trouble with the IRS, while funds from additional debts jeopardizes the applicant’s debt-to-income (DTI) qualification ratios.

 

Alternatives

As mentioned above, there are several alternatives to the hefty expense of down payment, closing costs, prepaid expenses and reserve requirements.

Unknown to many homebuyers, they can arrange for the closing costs to be paid by lender and/or seller.  They can also obtain third-party help in some circumstances.

Even today, there are no asset verification loan programs available. These programs have fewer asset documentation requirements, but they often entail higher down payment and credit requirements.

Your mortgage loan officer or broker can help you understand your options regarding documenting and providing sufficient funds for your home purchase and mortgage financing.