Avoid “The Big Gotcha” When Closing on Your Home Loan

My iPhone rang and on the other end of the phone was one of my clients, distraught, rushing to explain how the buyer (and the buyer’s lender) of her house did not have their cash to close verified yet.  Closing would be delayed, her interest rate would need to be extended, and her blood pressure rocketed while realizing moving plans had to be reconstructed.  Some form of this scenario happens ALL TOO OFTEN in today’s mortgage industry. 

Two reasons why the Big Gotcha happens...
1) Borrowers are not properly educated as to the importance of verifying cash to close and establishing a reasonable timeline. 

2) Today, more than ever, mortgage lenders create a thorough paper trail and document every dollar used in buying and closing on a new home.

The best way to avoid THE BIG GOTCHA is to make a game plan with your lender.  From the beginning, understand the amount of money you need to have verified in your bank account, when the money must be verified, and what documentation is needed for all non-payroll related deposits. 

A checklist to help you avoid delays and surprises…

 
1) Email your lender specifically where your money is coming from for the closing. Use specific dollar amounts if coming from multiple sources.

2) Establish a timeline with your lender on when those funds will be in the main bank account.

3) Request in writing from your lender what documentation will be needed to verify funds.

4) Contact your lender (as many times as necessary) before you move money from one account to another, get a gift for closing funds, sell an asset to another individual for funds to close or liquidate or borrow against a retirement account….yes, PLEASE over communicate!

5) Funds for closing must be wired to the closing agent’s account.  Contact the closing agent for wiring instructions and a time frame for when the wire should be sent.  Typically wiring funds 24 hours in advance is recommended.

Cash to close on the purchase of a new home can come in a variety of ways, including tapping into a 401k, receiving a gift from a family member, a settlement, selling a car, or selling jewelry... just to name a few.  I have even had buyers sell a race horse for funds for closing.

Examples of standard documentation required by a lender…

1) If using equity from sale of current home, please provide copy of closing statement on sale of home.

2) If selling an asset, please take picture of asset then provide documentation to establish a fair market value (e.g., blue book value if selling a car),. Also provide bill of sale, copy of check, and copy of deposit slip showing funds going into your bank account.

3) If tapping into a retirement account, please get a copy of the monthly statement, a copy of the check or proof of wire, and a copy of the deposit slip.

4) Getting a gift from a family member is great!  Simply get gift letter from your lender, get the letter signed by all parties, and get a copy of the check and deposit slip showing funds going into your bank account.

At this point you may be able to relate to the catch phrase, “moving paper through a paperless society" from Dunder Mifflin; the fictional paper company in Steve Carell’s sit- com, The Office.  Simply put, it is “documentation overkill."  Accept it as fact and then move forward with supplying the documentation.

The main thing you can do to avoid THE BIG GOTCHA is to work with your lender to create a game plan on what needs to be documented and when the money AND documentation will be ready. 

Two big “NO NO’s"...

1) Please do not sell an asset for cash or get a gift funds in cash.  Cash is near impossible to document.  You can see a common theme in this process: connecting the dots from where the money came from into the bank account that is being used for cash to close on your new home. 

2) Do not wait till the last minute.  Stay out in front of this potential pitfall by communicating with your mortgage banker.  If you are going to be out of town during any part of the loan process alert your lender and processor.  Going on a cruise for 10 days during the loan process without the right preparation and planning is likely to create a BIG GOTCHA.  Yes, it happens.

My goal is to provide you some checkpoints to avoid last minute chaos and disappointment.  Cash to close is a very big deal!  Typically there is a fair amount of documentation needed for cash to close.  In an age where technology is so advanced and the speed of communication is instantaneous, it is surprising how common this issue can potentially be.   Uneducated, unguided buyers are left with a frustrated (sometimes furious) look on their face as they scramble, jump, and crawl through last minute hoops to satisfy the lending requirements for cash to close. 

Buyers that plan and prepare in advance will continue to their closing without interruption.  Please use this checklist so that you can be that buyer!  It will ensure a more pleasant home buying experience, which is my goal as well as your Realtor’s goal.