SANTA CRUZ (March 16, 2008) - Even while lenders were offering 100% financing to homebuyers who had no cash for a down payment, they were requiring detailed documentation from those homebuyers who were buying a home with a down payment.

The one area that lenders have held steadfast on is the policy regarding borrowers’ savings. Lenders have been relentless in their insistence that borrowers prove that the money they plan to use for the down payment is their own money and not money that they have borrowed.

This attitude is from the age old concept that if a borrower has made a concerted, years-long effort to scrimp and save the necessary money for a down payment, it would be very unlikely he or she would risk losing that savings by not complying with their obligation to pay back the mortgage.

And, conversely, it goes without saying, that those who were allowed to buy a home without ‘skin in the game’ were more likely to walk away from their obligation when times got tough. It should be noted that ‘giving the property back’ to the lender is not an acceptable solution for a borrower who is having trouble making the payments. The borrower signed a note promising to pay back the loan, regardless of the subsequent value or condition of the property itself.

Cash is once again king when it comes to purchasing real estate. Except for perhaps a rare first time homebuyer or government program (FHA is not just for first time homebuyers and currently requires just 3 percent down), a significant amount of cash is again required to buy a home. Some loan programs may still not require the documentation of the source of those funds; however, the best rates are only available to borrowers who can demonstrate that the money to be used for the down payment is their own, “seasoned” money.

Seasoned money as defined by the mortgage industry is money that the borrowers have had in their bank accounts for a minimum of the last two months. The borrower documents this by providing two months of bank statements. By the way, internet printouts that do not fully state the borrower’s name, address and full account number are not acceptable documentation.

It is up to the borrower to accurately and adequately document the fact that the money that will be used for the down payment is his or her own money. Any large deposits in the past two months must be fully explained and documented. For example, if money was transferred in from another account, the borrower must prove that the money had been in that other account for at least two months.

Using money from a borrower’s business is precarious also and, if acceptable, would at least require a letter from the business’s accountant stating that the withdrawal of the funds will not be hazardous to the health of the business.

New accounts raise suspicion. If it becomes apparent that a new account was opened recently, the lender will want to know where the funds came from to open it.

Money that has been received as a gift from a relative is normally accepted as long as the borrower has a minimum of 5 percent of the sales price in his/her own, seasoned funds. Typically, if the down payment will be at least 20%, it may be all gift. The source and receipt of the gift funds must also be thoroughly documented.

This column is written every Sunday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.