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FHA loan question
So DH and I are putting in an offer on the house we want today, and are in the process of putting together the offer on paper with the REA.
We are doing an FHA loan, and have about 4.5% of the total cost of the house to put towards a down payment and closing costs. To get this house, we are asking for 5% sellers assist in closing costs in our initial offer (FHA allows up to 6%).
The REA told us that she would have to double check with our LO, that we may need to have a reserve in the bank to get approved in underwriting. We don't have a problem necessarily getting this reserve, since our REA told us that what we do with it the day after closing is up to us - we are able to ask either of our grandparents to "loan" us the money to have in the account until after closing, then give it back to them.
My question is - has anyone else been told this, that they need a reserve in the bank with an FHA loan? If so, how much (%-wise or actual number) did they require?
TIA!
Re: FHA loan question
I have heard that some lenders doing FHA want to see funds in the account for at least 30 days. However, many times they also ask for either a gift letter or proof that the money is yours, free and clear, and you dont owe it back to anyone.?
Your REA is giving you dangerous advice that could be considered fraud. I would go directly to your loan officer (dont have your REA ask, it's YOUR responsibility) and double and triple check the?requirements. ?
I'm sorry I wasn't clear!! THat's what I get for typing at work, and then leaving for an appointment...
We're going to be applying for the $7500 first time home buyers credit come tax time, and we have the agreement with my grandparents that once we receive that, we can pay them back. So they're giving us a gift for buying our home, then using part of that $7500 to pay them back. Then we will still have the reserves we need to have the emergency fund, plus a little extra to put towards renovations.
We have about 1 months worth of expenses in an efund right now, but I wasn't sure if that would be considered enough of a reserve. Our grandparents are officially calling it a gift (and knowing my grandparents they will probably tell us to keep it once we get the tax refund) so I'm not sure if that clears things up...
Alternatively, we were considering not using everything we have as the down payment, and giving the minimum 3.5%, thus freeing up some of the money we have saved. I just was wondering if there was a set number, or percentage, that we should aim for to have as reserves.
Thanks!
I'd say clear this up with your grandparents first on whether it's a gift or a small loan to avoid any issues.
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Yes, you should have reserves. If buying a house completely wipes out all of your money, you're probably not in a position to buy a house. The lender wants to make sure that you can at least make the first payment and if it takes all of your money to come up with the DP and closing costs, the money to make the first payment won't be there.
Here is the difference between a loan and a gift. It is quite simple. Do you have to pay the money back? If you do, it's a loan and needs to be disclosed as such to your lender. If you do not have to pay it back, it is a gift and needs to have a gift letter accompanying it. It sounds to me like your grandparents are LENDING you the money and you are paying it back when you get the tax credit. You need to let your lender know that this is a loan and not a gift. To call it a gift is unethical and potential mortgage fraud.
What is the difference in payments if you put down 3.5% vs. 4.5%? If it's a very small difference, you very well could be better off putting less down and keeping more of your cash. You would have to sit and do the math on that to figure out which is better for you.
If you have to give ANY of the money back to your grandparents then it's not a gift, it's a loan. Telling the bank it's a gift would be fraud. If they want to give you the money, then they need to be clear up front that it's a gift with no obligation to ever pay them back. If they're not sure yet, or you simply suspect that they'll end up telling you to keep it, it's a loan. ?
If memory serves, we had to show that we had 6 months' worth of mtg payments in reserves, which could be cash on hand or accessible 401K/Roth money. If you're going to get money from relatives, you better do it BEFORE you apply for the loan or you'll have to explain how you got it and the relatives will have to sign a "gift letter" verifying that you don't owe anyone that money.
FHA does generally not require reserves. If your DTI is on the higher end of the spectrum and you have reserves, the reserves will help you get the FHA loan.
On the flip side your REA should not be asking your LO those types of questions, YOU SHOULD. If you want to avoid problems keep contact between the 2 minimal and you be the go between. If they do speak confirm everything as it is really easy for misunderstandings/problems to occur this way.
We met with both the LO and the REA separately last night - she specifically asked the LO to be there to meet with us before we put our offer in writing, since she knew we had questions about the FHA terms. She doesn't actually serve as the go-between, though. We have always had separate contacts between the two of them - but she needed to get in touch with him anyway to have our pre-approval letter drafted to go with the offer we were putting together, so she relayed the question to him, and asked him to address it with us.
The LO actually told us that we do NOT need a reserve, based on what we're looking for now, but if we were trying to get the loan for much higher than we were looking at, we would. We were really glad to hear that - because I was afraid we would need about 3 months worth of reserves as an efund. We have about 1 month now, and will be able to gather another month's worth or so before our projected closing - and we want to beef up our "renovations and furniture" fund as well, so we'll be contributing to both in the meantime.
Good news is, after all of this - we put a really tempting offer together that is less than what we were aiming for ideally, and should be difficult for the seller to pass up! We also have a bit of wiggle room that way too
They're actually moving next week, and JUST put the house on the market - we've been eyeing this neighborhood for a while and this is a slightly less upgraded model than what we've been looking at - but the layout is AMAZING and it has "good bones"!! We just need to do a bit of cosmetic work like painting!
Thanks for all of your answers! Wish us luck on this offer!