A Personal Loan
When funds are obtained from repayment of a personal loan made by the borrower, the following documentation is required:
A written agreement between the borrower and the recipient of the loan Verification evidencing the borrower's ability to lend the funds
Evidence the funds were withdrawn from their account Verification that repayment has been made
o Provide statements verifying the funds being withdrawn from the recipient's account and deposited into the borrower's account Retirement
Accounts
Funds from individual retirement accounts (IRA, 401K, Keogh accounts) may be used as a source of funds for the down payment, closing costs or reserves.
A 401(k) account may only be used to the extent the borrower is vested in the account. The account balance and the vested amount must be verified. When retirement accounts only allow for withdrawal in connection with the borrower's employment termination, retirement or death, the vested funds should not be considered as reserves.
A copy of the most recent depository or brokerage account statement must be
provided. When funds from these sources are being liquidated for the loan transaction, the funds must be withdrawn and proof of withdrawal must be provided. Subtract 40% from the vested amount (after the reduction of any personal loans) to account for any applicable withdrawal penalties or income tax so that the ―net‖ withdrawal is counted (the portion of the account secured by a personal loan may not be considered available to the borrower for reserves). The loan proceeds received from a loan secured against a retirement account may be considered liquid funds available for the transaction.
When funds from these sources are used to support the cash reserve requirement, it is not required that the funds actually be withdrawn from the account but the 40%
deduction rule still applies when calculating the amount of cash reserves. A higher amount may be used with documentation that a higher percentage may be withdrawn after subtracting any federal income tax and withdrawal penalties.
Secondary Financing
Secondary financing is any loan secured by the Mortgaged Premises other than the first mortgage. The lien created by the second mortgage must be clearly subordinate to the first mortgage.
The monthly payment on the second mortgage must be included with the PITI on the Mortgaged Premises when calculating the housing expense-to-income ratio.
Asset Sources (continued)
Stocks / Bonds The value of stocks, bonds and other securities must be documented with one of the following:
Verification of Deposit
Most recent monthly statements for the past three months A quarterly statement
Photo-copy of the stock certification accompanied by a dated newspaper stock list
Government savings bonds should be valued at their purchase price unless redemption value can be verified.
Verification of liquidation and receipt is required when the funds from the sale of stocks/bonds are used for down payment, closing costs or other costs.
Stock – Privately Held Corporation
When the stock of a privately held (not publicly traded) corporation will be used as funds for down payment, closing costs or reserves, the price per share must be validated by a CPA for the corporation. A copy of the Buy/Sell Agreement is also required. Verification of receipt of the funds from the sale of the stock is required. When the privately held corporation is a source of the borrower's income, the above documentation will be required together with verification from the accountant that sale of the stock will not have an adverse effect on the business or reduce the borrower's current income level.
Sweat Equity Sweat equity is labor performed or materials furnished by the borrower before closing takes place for the property being purchased. Sweat equity may be considered the equivalent of a cash investment to the extent of the estimated cost of the work or materials and as long as all FHA requirements are met.
Sweat equity may also be ―gifted,‖ subject to all FHA gift requirements. A gift letter is required and all CMS guidelines regarding sweat equity must still be met. For complete details on using sweat equity as part of the borrower's acceptable assets, refer to the 4155.1 Rev 5 Section 2-10 –O.
Systematic Savings
Borrowers should have the funds needed to close the transaction. However, a loan to a borrower who does not have sufficient assets to close may be submitted to
Underwriting subject to the following parameters:
80% of the required assets must be documented
The ability of the borrower to save based on his or her income and debts must be documented
The required assets must be documented and verified in the borrower's account prior to closing
Completed and executed Notice to borrowers form and the Systematic Savings Worksheet
Upon receipt of the above documentation, re-submit the loan for review by the underwriter to determine that all asset requirements have been satisfactorily met.
Asset Sources (continued)
Trade Equity The property seller may take a property owned by the borrower as part of the down payment on the property being sold to the borrower. The borrower's equity contribution must be a true value consideration supported by a current appraisal.
The following documentation must be provided:
Copy of the current appraisal on the property being traded A copy of the trade-in contract
Title search proving that the borrower owns the real estate and verifying any liens associated with the property
To calculate borrower's equity, use the following formula: (lesser of current appraised value or trade-in price) minus
(outstanding liens plus transfer fees and real estate commission) = borrower's equity
The property seller must provide proof of title transfer in addition to verification that either all liens have been satisfied or the borrower is released of liability by an approved assumption. The transfer deed must be recorded.
The above rules apply to all trade-in transactions, including those evidenced with two separate contracts in which buyer and seller reverse roles.
If the property being traded has an FHA insured mortgage, assumption processing requirements and restrictions apply.