Back in the day, a person needed to shoulder half of a house’s price to qualify for a mortgage to buy it. Over a decade ago, lenders were selling home loans liberally. These two extremes did not benefit everybody in the long run.
Now, moderate asset reserve requirements exist to weed out unready homebuyers and curb the irresponsible sale of mortgage loans in Utah, Texas, California, and anywhere else in America. If you play by the rules, you can afford your dream property without having to part ways with most of your savings—gain, only if you play by the rules.
You can be as creative and resourceful as you want when producing enough asset reserves, but these strategies will not fly:
Mortgage lenders impose loan-to-value (LTV) ratio minimums for a reason. If a lender observes a 97% LTV ratio, it means that you have to pay for the 3% out of pocket. Generally, the funds you can use should be the fruit of your labor to demonstrate financial discipline and capacity to repay a loan worth hundreds of thousands of dollars. In other words, you can’t acquire a debt to close the gap. Your mortgage lender will scrutinize your credit reports to see if you have taken out any loan recently and find out if you are still paying for it, if there is any.
You might borrow from a loved one or a friend under the radar, but you might get away with it. But you will just be fooling yourself. You can’t really afford to buy a property with your current employment and income.
Using Seller Contributions Incorrectly or Excessively
To be clear, you can use monetary handouts to beef up your cash reserves. Gift money must only come from legitimate donors. Any party that may gain from the real estate transaction is generally disqualified to donate money. Sometimes, though, a home seller can be an exception.
If the seller is desperate enough to get rid of the property you want to buy, you can ask for a monetary contribution to help close the deal. Your mortgage lender may allow a seller contribution, but not without limits. The money must be proactively disclosed, and it should not exceed the threshold the lender sets depending on the type of property and type of loan.
Not Leaving a Paper Trail When Receiving Gift Money
When accepting gift money from acceptable donors, like your parents, your spouse, or your children, make sure that the cash leaves a paper trail. You need proper documentation to prove that the money that you want to use in fact came from the donor. Without an adequate gift letter, your mortgage lender may decline it.
Depositing Funds Shortly Before Loan Application
The worst mistake you could possibly make is not seasoning your funds. As a general rule, you should deposit all of the money you want to use as cash reserves two months before you apply for a mortgage. Otherwise, your lender will be extra inquisitive. Large irregular deposits set the alarm bells ringing.
Use common sense to present proof that you have enough assets to pay for the down payment and closing costs up front and continue repayment for a couple of months despite losing a source of income. Trying to outsmart a mortgage lender hardly works, so do not dare to do anything that constitutes fraud to keep your homeownership hopes alive.