Cash to close:
Cash to close is the term used for the down payment OR any other money needed for closing. There are specific requirements for government insured loans in regards to where money for the loan transaction comes from. The underwriter will want to make sure you have the money to close and also to verify the money for closing is from an acceptable source.
You cannot use borrowed funds for the loan transaction for USDA or FHA loans. Any borrowed money would have to be paid back and that would affect the debts you have. The debts you have directly affect your debt to income ratios. Also, borrowed money could produce a lien against the property if you did not pay it back.
You may get a gift from a family member for the money for closing.
Bank statements are needed to verify the cash needed to close. In some cases the underwriter may also require bank statements to verify rent or strengthen the file. The underwriter will look for overdrafts and NSF charges. If you do have either, please include a signed letter to explain them.
If you are getting a gift for funds for closing please gather the following documents:
Completed and signed gift letter
Proof the donor has the funds to gift to you (bank statement with all pages before the gift was deducted)
Proof of the gift (copy of check or bank statement showing the deposit to your account)
Your bank statement showing the deposit and the available balance with the needed funds to close
The earnest money deposit is a part of the transaction which is why the proof is required. You will need to provide a copy of the cancelled check (front and back) to show the money came from you. If you use cash or a money order we need the full bank statement, all pages, for the month the withdrawal came out of your account.
LOX stands for letter of explanation. There could be numerous needs for a letter of explanation. In some cases letters are needed to explain your credit history, address history for the past 24 months, household income or employment concerns.
Your credit report is a key factor for the loan. The credit report gives the underwriter an overall picture of your payment history and the likelihood you will repay the loan.
Credit Inquiry Letter:
You may be asked to write and sign a letter to explain the recent inquiries on your credit report. This is required so the underwriter can determine if you have any additional debts to add to your debt to income ratios that do not show on your credit already. This is a concern because it can take up to 60 days for an account to report to your credit so an inquiry could signal another account with another payment.
USDA loans will require a well (water) test for all homes with well water. This is a simple bacteria test that can usually be done by the health department or home inspector. Your realtor should be able to advise where this test can be done.
Debt to income ratios are important for loan qualification. Every loan has a certain ratio limit that they will allow. Your front end ratio is the ratio of your income to your proposed housing payment with taxes and insurance. The back end ratio is your income to the total amount of your debts on your credit plus your proposed housing payment with taxes and insurance.
HOI is short for Homeowners Insurance. Homeowners insurance is required for every loan. This protects you in case there is a disaster with your home. The lender requires proof of this insurance before closing to make sure their interest in the property is protected. You may choose the insurance agent and you will need to set up this policy before the loan closes. You do not need to pay for this, but you need to set up the policy. Once you know the agent you would like to use, you should send their information to your loan officer or loan processer.
If you have been divorced you will need to provide your full divorce decree, all pages, and your separation agreement. This is required to determine if you are responsible for any additional debts or property that may not show up on your credit report.
When an underwriter reviews loan files he/she may take into account compensating factors. Compensating factors cannot cancel out a lower than required credit score but they can help strengthen a weak loan file. For example, if your credit score is 602 and the required score is 620, no amount of compensating factors can allow you to qualify. Compensating factors are used to help a file that might otherwise be in jeopardy of a denial.
One of the most common compensating factors is the ability to show liquid assets from a pattern of savings as oppose to a standard housing expense. Proving you pay rent is important and if you cannot prove it, sometimes showing you are conservative and have the ability to save money can offset that.
Other compensating factors include but are not limited to: verified rent history, low debt to income ratios, stable job history, no payment shock, or a high credit score (over 680).
Acceptable Rental History
One of the key factors to having a strong loan file is proving you have been paying rent for the past 12 months. We get the question many times about landlords and letters for your rent verification. Unfortunately, a letter from an individual is not considered an acceptable verification. In the past years, there was an abundance of false statements from landlords which made buyers appear to have a rent history when they did not. Often times, buyers rent from friends or family in which case a letter would be even less of a help.
There are only two acceptable ways to verify your rent:
- If you rent from a property management company they can fill out a verification of rent paper for you as a property management company cannot falsify the form.
- If you rent from an individual you need to provide 12 months of cancelled rent checks from your account. If you pay online that is ok, you would just show the 12 months of bank statements showing the money coming out of your account each month.
Cash is never an acceptable form of rent unless you have a withdrawal for that same amount on your bank statement each month. If you have the option, please always pay your rent with a personal check as it will make your loan much easier.
The underwriter will also be looking to make sure you have not paid your rent over 30 days late in the past 12 months.
Non-Traditional Credit Accounts:
Non-traditional credit accounts are often also referred to as alternate trade lines. A trade line is an account. Most accounts report to your credit report which verified whether or not you have a history of paying your bills on time. The problem is not everyone chooses to have car payments, loans, student loans or credit cards which make it hard to prove they pay their bills on time. In certain cases, you may use non-traditional credit accounts to show a stable pay history. For a buyer that doesn’t have any open accounts or a 12 month history on their credit there is an option.
Non-traditional or alternate trade lines do not already show up on your credit. These need to be accounts that have your name on them, have been open for at least 12 months and have no 30 day late payments in the past 12 months. Some of the most common accounts people use is cell phone, water/sewer, electric bill, gas bill, cable bill, car insurance, gym membership, storage units or anything else you pay each month that is not on your credit report.
When applying for a USDA loan, household income is very important. The USDA loan is the only loan that currently has income limits that the household must meet in order to qualify. USDA will need to know the income for ANY MEMBER of the home, even if they will not be on the mortgage. This includes income from a spouse, any child support/alimony or any other regular monthly payments a member of your home receives. When discussing your income with your USDA specialist be sure to inform them of any income that the members of your household receive.
There are different limits for every county. In higher income areas the limits are much higher. They also have a higher amount for households with 4-8 people. Households with 1-4 people are limited to one amount and households with 4-8 people have a higher amount. There is also a slight credit for any child under 18 living in the home, any disabled person or person over age 62.
Debt to Income Ratios
Debt to income ratios tell the underwriter how much you are spending on a home and your other debts listed on your credit in respect to your monthly income.
In regards to a USDA loan the standard max they will allow is 29/41%. The exact breakdown of what each ratio is will be in the next section.
If you have a strong loan file with compensating factors you can go to a max ratio with USDA of 34/47.99%.
Front End Debt to Income Ratio
The front end debt to income ratio of 29% is the ratio of your monthly income/the proposed housing payment WITH taxes and insurance.
For example: If T. Smith makes $5,000 per month and is looking for a housing payment on his new home of $950 his front end ratio is 19%. This is below the 29% which is a conservative ratio.
Back End Debt to Income Ratio
The back end debt to income ratio of 41% is the ratio of your monthly income/the proposed housing payment WITH taxes and insurance PLUS all the minimum payments of your debts reporting on your credit. For USDA this includes student loans even if they are deferred.
If T. Smith who makes $5,000 a month has a car payment of $400, an unsecured loan payment of $250, plus the proposed housing payment of $950, he has a proposed monthly debt of $1,600. His back end ratio would be 32% which is also a conservative ratio as it is under the 41%.
The 4506T is a form used to request the tax transcripts from the IRS. A transcript is not a full tax return. It is a breakdown of the key figures for your tax return. It will list the wages you claimed, any 1099 or self-employment income, unreimbursed business expenses and your adjusted gross income.
Tax transcripts are required for the last two tax filings before ALL loans can close. If you did not file a tax return for the any of the prior two tax periods preceding your loan application please let your loan specialist know as it could delay your closing. If you applied for a loan on November 1, 2013 they would request the tax transcripts from the IRS for 2011 and 2012.
The reason the transcripts are needed is due to the overwhelming submission of false documents in the years preceding the mortgage foreclosure crisis. Loan applicants were providing false pay stubs, false W-2’s and even false tax returns. The only way to actually verify the income matches what is stated is by comparing it to the numbers the IRS has.