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5 Creative Ways to Come Up With a Down Payment

by Mike Morse

To successfully purchase a home today, you will need a down payment of at least 3.5% of the purchase price. Gone are the days of no down payment alternatives, down payment assistance and seller-offered programs to come up with the money needed to buy a home. Instead, let’s look at the five ways you can come up with a down payment to seal the deal.

1. Gift Money
Gift money is simply that — a gift from family or documented close relationship. The giftor needs to provide a gift letter and paper trail of the monies they are gifting for the benefit of the buyer. In other words, they’ll have to provide a bank account showing they had the ability to gift the money. In short, gift monies cannot be funds sitting at home in a safe.

2. 401(k)/Retirement Loan
Typically, borrowed funds for a down payment are a no-go, but the exception is a 401(k) or equivalent retirement account (or current home equity line). If you can borrow money from your 401(k) for your down payment, this is accepted for obtaining a purchase mortgage loan.

Note: Depending on the terms of your loan, this could be counted as a liability and factored into your debt to income ratio.

3. Sale of a Good
Believe it or not, you can sell your recreational vehicle and use the net proceeds from the transaction as your down payment. Let’s say you decide to sell your motorcycle for $10,000. You’ll need to provide the full bill of sale — as well as the bank statement depositing those funds, matching the bill of sale — to your mortgage lender. Same goes for any other recreational vehicle, or other item that “makes sense.” The key is as long as it’s plausible and passes the litmus test and you can paper trail the monies from start to finish, you should have no problem using those monies for the house purchase.

4. Trust Funds, Settlement Awards, Etc.
If you come into a chunk of change via an inheritance, settlement, lottery winning, trust fund disbursement, family buyout, even a gambling victory, all of these monies can be used for the down payment as long as the sourcing of the monies is fully documented from A to Z with no stone left unturned. Matching of the amounts of monies used to the original deposits will be required when it comes time to secure the loan.

5. Line of Credit
Where a down payment lacks, enter strength in income. You can take out a line of credit or a personal loan, deposit the full funds into your bank account and after two months, the funds will be eligible for use in the transaction.

While a down payment is needed to purchase in the current real estate market, a prudent homebuyer should also have plans for having available funds for closing costs. The same out-of-the-box strategies listed above can also be used to procure funds for closing costs.

Closing costs run 3% of the purchase price, on average. So the total funds to close would be sum 3% of purchase price +3.5% down.

Do your homework. If you don’t have a down payment for a house, or your down payment is coming from more than one source, make sure you talk to a lender upfront so they can help you navigate the best way to properly support and document your monies used. Doing this on the front end will save you from wasting time creating and gathering unnecessary paperwork.

Understanding the Earnest Money Deposit

by Mike Morse

The earnest money deposit is an important part of the home-buying process. It tells the seller you’re a committed buyer and helps fund your down payment.

What Is Earnest Money?
Earnest money is a deposit on the house you want to buy. It shows sellers that you are earnest about buying their home.

Without earnest money, you could make offers on many homes, essentially taking them off the market until you decided which one you liked best. Sellers rarely accept offers without deposits.

Assuming that all goes well and you buy the house, the earnest money will go toward the down payment and closing costs. In many circumstances, you can get most of your deposit back if you discover something that you don’t like about the home.

How Much Should You Put Down in the Earnest Money Deposit?
The amount of the deposit varies. In a slow real estate market, $500 or $1,000 might be enough. When there is more demand for the house, the seller will require more — usually 1-3 percent of the offer.

In some markets demand is so great that the seller will look for a higher deposit before accepting your offer over someone else’s. You can sometimes win a bid if you give the seller a large deposit. In fact, the seller may be willing to come down in price a little if you make a bigger deposit. If your deposit is extremely large, your mortgage lender may want to verify the source of the funds. As long as you can show you’ve had the money for at least 60 days, it won’t be a problem.

When Do You Pay the Earnest Money, and Who Holds It?
You hand over earnest money after your offer on a home has been accepted and you have signed the purchase agreement. The title company often holds the deposit. In some states, the real estate agent holds the deposit. Always check the credentials of the firm or broker taking the deposit, and verify that the funds will be held in escrow until the purchase goes through.

Never give the earnest money to the seller. It could be impossible to get it back if something goes wrong.

Can You Get Your Earnest Money Back?
If the deal falls through, a small cancellation fee is usually taken out of the deposit, but the remainder remains in escrow. Whoever holds the deposit determines whether you should get the money back under the terms of the purchase agreement.

Make sure that the purchase agreement covers how a refund is handled. Eager buyers sometimes give up their rights. But keep in mind that even if you are pre-approved for a mortgage loan, you can be declined when you apply for one. Standard contracts allow you to recover your earnest money deposit in this case. You can also usually get your money back if you find problems with the property.

Laura Sherman wrote this article.

How to Pull Cash From the Home You Just Bought

by Mike Morse

As this exuberant housing market takes shape, the chance to harvest equity – to tap into idle cash – from your home may prove to be a worthwhile endeavor. In March 2011, Fannie Mae lifted the requirement that you had to hold title to a property for six months before you were allowed to access your cash equity.

The change has since allowed homeowners to acquire property and then immediately cash-out refinance to replenish liquidity, purchase other real estate, do home improvements or pay off debt. However, while it is a viable strategy, successfully sealing the deal on the “delayed financing” is something else entirely. Here’s what you need to know.

A Free and Clear Property
The property – whether it’s a single-family residence, multi-family property, condominium or planned unit development – must be free and clear of any liens. In other words, there can be no recorded mortgages on the title. Essentially, you can pay cash for a house, then turn around and immediately do a cash-out refinance without having to wait six months, as previous guidelines required. In a competitive purchase market with multiple offers, using this strategy to buy other real estate can give you an advantage, because with cash financing, the close of escrow can be days rather than weeks, as other buyers line up financing.

Supporting Documentation
This is where things can get tricky. If you’ve gotten a mortgage in the past three years, you’ll know the level of documentation and scrutiny underwriting gives to supporting documentation, as well as credit, debt, income and assets. Such is true with the “delayed financing rule refinance” – supporting documentation is key to getting the cash.

Delayed Financing Essentials
You can access up to 70% of the current appraised value or the acquisition price of the property, whichever is lower. For example, if the price of the home was $400,000, with an appraised value $425,000 — 70% of $400,000 would be used, so the maximum loan amount would be $280,000. That 70% is applicable to a primary home, second home or investment property.

The new loan amount cannot be more than the documented amount of the initial capital used to acquire the property, including any applicable closing costs, prepaid fees (taxes and insurance) or associated discount points.
The rates and terms are proportionately higher. A cash-out refinance will contain an added small margin because the loan is a “cash-out.” Other factors could lead to adjustments, as well — like your credit score, or the property type you’re refinancing (however, most delayed financing is sought for occupancy and investment properties).
There can be no relationship between the buyer and seller on delayed financing loans. Sorry gang, you cannot buy the home from your grandmother with cash, then re-mortgage immediately. This would revert back to the full six-month hold time. The relationship between the buyer and the seller must be at what’s called an “arm’s length.”
If the original seller of the property was an entity such as an LLC, principles of the LLC must be documented with their ability to sign on behalf of the entity.
The final closing statement from the recently acquired property must be provided, also called a HUD-1. This will support the fact no other liens were used to acquire the property.

Where Things Get Technical Fast
Properly sourcing the funds you use to acquire the property is essential. This means you’ll need to provide bank statements, personal loan documents, how the property was acquired — with every dollar accounted for. This is where it would be helpful to work with a lender who is proficient in successfully closing delayed financing deals.

Finally, while the property for which you’re seeking a cash-out refi must be free and clear of liens, there is an exception. If you took out a personal loan to purchase the property, that can be acceptable, as long as the terms are provided and the personal loan is paid off through the proceeds on the new loan being sought. The same goes for any other loans between parties used to purchase the property — they must be paid off through the net proceeds by closing time. The refinance provides a window for people looking to keep their cash liquid while at the same time conservatively leveraging real estate.

Published by: Scott Sheldon is a senior loan officer and consumer advocate based in Santa Rosa, California. His work has appeared in Yahoo! Homes, CNN Money, MarketWatch and The Wall Street Journal. Connect with him at Sonoma County Mortgages.

Should I Buy a Home Now?

by Mike Morse

We are often asked if this is a good time to buy a home. Some clients are concerned that home prices may fall down the road, while others are convinced that home prices will go up.

Home prices are one factor in determining your cost of ownership, but so are interest rates and financing availability. Even though interest rates have fluctuated, they are still near historic lows. Since your monthly mortgage payment is a combination of paying down your principal and paying the interest owed, a one point rise in interest rates could cost tens of thousands of dollars over the life of your mortgage!

While a home is a major investment, it is also the center of your personal life. It's important to live in a home that reflects your taste and values, yet is within your financial "comfort zone." To that end, it may be more important to lock in today's relatively low interest rates while they are still available.

Please give a Morse Real Estate RealtorĀ® a call if we can be of any assistance in determining how much home you can afford in today's market.

Mike Morse
Broker & Owner
(402) 677-6356

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