So, let’s say you pay $2000 in cash for the Earnest Money needed for your new home in Clayton, NC. How is that going to play with the Underwriter?
Well, this is going to make The Underwriter’s red flag pop-up (and their red pen with LOTS Of conditions will fly out) on this. We must verify that your Earnest Money is NOT tied to new/more debt, such as a loan or credit card advance. They’ll also want to know if the money is considered a gift. Point being – it had to come from somewhere. Maybe you:
- Sold your Bass Boat (had a client that did this)
- Sold your Airplane (had this too)
- Sold the Silverware your Grandmother left you (client did this)
- Had a Yard Sale – $2000 at a yard sale is a BIG yard sale!
Point being, any of those items will show a paper trail. We can show you owned the boat, silverware, etc. and a receipt where you sold it. We will need to establish the VALUE of that item, and that you didn’t sell a $20 Comic Book to your Friend for $2000 – and you will really owe him money back. (I’m hoping I’m making sense, we have to OVER document that it’s not a debt…) Let’s just speculate for a minute that maybe you worked on the side as a Painter, and people just happen to pay you for those services. Well, if you don’t report it on your tax returns, we can not use the money as income to qualify you. If you don’t put it in the bank, so there’s no “history” of you having it – it’s going to be very difficult for us to use that money as a down payment.
“Earnest Money” is a Buyer’s “promise”/ or commitment to proceed with a Contract, once the Sellers have accepted your offer.
It’s also considered a part of your Down Payment, so it’s importance within your transaction can’t be underestimated. Any client offering cash as their Earnest Money will need to explain where that cash came from … and then provide documentation to prove it. Underwriter’s have to be able to document the file with a clear “paper trail” of where the money came from.
Want to avoid getting red flags from the Underwriter? Well, the easiest way to remember that when you give Earnest Money with the Contract negotiations, write a personal check or get a bank check from the account you plan on using for the remaining portion of the down payment you are going to need. The money needs to “season” in the account for at least 60 days – 90 days is BETTER. Remember, we don’t report your deposits, gifts, etc. to the IRS when you are getting a mortgage…
Now I know, USDA home loans in NC and VA Loans don’t require a Downpayment. With those loans, the additional money you give in Earnest Money will be used to cover your closing costs, or refunded to you if you “over pay.”
Let’s say you are “getting a gift.” Well, first off, if actually has to be documented too. So the money has to be documented as actually being in the “donors” account, and coming out and there’s a letter we need. We have to have the Paper trail. Bottom line? Should any of the money for Down Payment be a Gift, the Underwriter will again want to make sure that the money received is not tied to any expectations of repayment.
In addition to documenting the cash needed to close. You are going to need a history of good credit to buy a home. In general, we need a score of 640 for a Government Loan Approval, although, in a few cases, NC Affordable Housing Agency will grant loans to those with scores between 600 and 640.
If you have questions about documenting a large Cash Deposit for a Mortgage Loan in NC, and you are ready to buy a home, please call Steve and Eleanor Thorne, Mortgage Banker in Cary , 919-649-5058. Connect with us on Google +