Jim’s Mortgage Corner | Immovable
We have the money in a safe and plan to use it for a down payment on our first home this year. We were told we cannot use cash for a deposit. Please explain why this is not acceptable and list other things we should or should not be doing in order to buy our first home. Thank you!
Congratulations on your plans to buy your first home! It’s a great way to build equity for your future instead of for your landlord.
Under the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act of 2008), all funds must be accounted for in the mortgage transaction. If you plan to use this money in your safe or hidden under the mattress I’m sorry to say, but these funds cannot be used for your down payment and / or closing costs. You will need to deposit the money into your bank account for at least 60 days or more, as lenders will need two months of bank statements to verify your funds for the down payment and closing costs. The same goes for cash gifts from parents. If your grandfather wants to offer you money, this will need to be documented and show that the funds are seasoned in his account, as he will also need to provide bank statements.
In the period leading up to your mortgage application, please do not apply for new loans for furniture, appliances or other items. You can pay for these items in cash, but make sure you have enough funds in your checking and savings accounts to cover your closing costs and your closing down payment. Most importantly, after applying for a mortgage, don’t apply for new loans and buy the new car you’ve dreamed of.
I understand you may want to purchase furniture, washer and dryer etc. before moving into your new home, but you should keep your current debt to a minimum, as mortgage lenders will qualify you based on your debt-to-income ratio. The forward ratio is your new mortgage payment (including principal, interest, risk insurance, taxes, mortgage insurance, and HOA) divided by your gross income. The repayment ratio includes your mortgage payment and your existing debt, including credit card payments, automatic payments, student loans, etc. divided by your gross income. Each loan program uses different ratios, but a good rule of thumb is to keep your Back ratio at 45-50% of your gross income. If your gross income is $ 5,000 per month and your new home payment will be $ 1,400 per month, you should maintain your existing payments on credit cards, cars, etc. at $ 1,100 or less.
Your credit rating can affect your interest rate and mortgage insurance. In most cases, the higher the credit score, the better your rates. The perfect combination of credit is two installment loans and three revolving accounts (credit cards, lines of credit) with balances below 30% of the high credit limit. If you are paying accounts, please do not close them. Over 50% of your credit score is based on payment history and the length of payment history, but only on open accounts.
To avoid any surprises, now is a great time to get an up-to-date credit report for FREE through www.annualcreditreport.com. Why wait for the lender to surprise you with information on your credit report such as collections or other debts that you may not have known about that will need to be addressed before proceeding? Check your credit now to make sure everything is correct and you will avoid any delays in the loan process.
Thanks again for your excellent questions.
Branch Manager, NMLS # 1721861
Cherry Creek Mortgage, LLC, NMLS 3001