Your Mortgage Design Blog

When a home buyer is gifted cash for a downpayment, there is a right way and a wrong way to receive the funds.

The right way includes:

• Completing an acceptable gift letter
• Documenting the withdrawal of funds with receipts
• Documenting the deposit of funds with receipts

The wrong way is to ignore the rules that mortgage lenders clearly spell out for you.

Mortgage lenders watch gifts closely because they want to make sure that the "gift" is not really a loan-in-disguise.  If it's a loan, the total dollar amount must be counted against the home's total loan-to-value and higher loan-to-values typically increase lender risk.

If it's a gift, a signed and dated gift letter should accompany the home loan application.  An example:

I am the [relationship to recipient] of [name of recipient] and this letter serves as evidence that I am gifting [name of recipient] [amount of gift] to be used for the purchase of the home at [complete address of property].

This is a gift -- not a loan -- and there is no expectation of repayment.

Signed,
[Signature of donor]

For additional evidence that the gift is legitimate, the recipient should make sure that deposited funds are not commingled at the bank.  If the gift is for $12,000, for example, then the recipient's bank deposit receipt should indicate that a $12,000 deposit was made.

There may be legal and tax liabilities when gifting funds between family members so if you're unsure about how donating or receiving a gift may impact you, call or email me.  If I can't answer your question, I can certainly refer you to somebody that can.

When the everyday "Cost of Living" increases, our dollars don't go as far as they used to.  Economists call this inflation.

One popular method of measuring inflation is to track prices for 84,000 individual items and lump them together into a "basket".  If the overall price is higher, then the economy is experiencing inflation.

If a picture is worth a thousand words, this one from The New York Times is worth at least 84,000. 

Broken down item-by-item, life is more expensive in some places you expected, and some places you didn't.  For example, over the past year:

• Gasoline: +26%
• Milk: +13.3%
• Children's Shoes: +4.6%
• Pet Supplies: +6.8%

Aside from damaging household budgets, inflation can be especially rough on both active home buyers and homeowners looking to refinance.  Inflation is linked to high mortgage rates. 

This is one reason why mortgage rates have fallen since the Federal Reserve's hints last week that its rate-cutting cycle may be over; many believed that additional Fed Funds Rate cuts would stoke inflation later this year.

In the absence of inflation, mortgage rates tend to improve (all things equal).

Source
All of inflation's little parts
Matthew Bloch, Shan Carter and Amanda Cox
The New York Times, May 3, 2008

To stay informed, just check out my daily blog at Your Mortgage Design Advisory Report

Real Estate Term: Earnest Money

When a buyer and seller reach agreement on a home sale, the buyer typically puts a small amount of money into a trust account. 

This up-front deposit is more commonly known as "earnest money".

A sales contract's earnest money requirement will vary from contract to contract.  It can be as high as 10 percent of the purchase price and could be as low as $500; earnest money is a negotiable item between buyers and sellers.

Some factors that can influence earnest money amounts include:

• Market conditions: Stronger markets often call for more earnest money
• Buyer economics: First-time buyers often give less earnest money
• Seller psychology: Skeptical sellers often ask for more earnest money

No matter how large or how small, however, earnest money is supposed to give the seller a sign of good faith that the buyer wants to purchase the home. 

To this end, earnest money can be forfeited if the buyer later "backs out" of the deal, or breaches the terms of the purchase agreement. Breaching, however, is infrequent. 

This is because most purchase contracts are written with buyer-focused "outs" called "contingencies". 

A typical contingency is that the seller must provide a clean title policy to the buyer, or that the buyer must secure financing prior to given date, or that the home must pass a satisfactory inspection.

If any of these contingencies cannot be met, the purchase agreement is voided and earnest money returned to the buyer.

When contingencies are met, however, earnest money becomes a deposit and is applied directly to the buyer's bottom line at settlement.  If the buyer is expected to have $50,0000 for the closing, for example, the true bottom line is $50,000 minus the earnest money deposit.

Earnest money customs vary from state to state, city to city, and even locale to locale.  Be sure to ask your real estate agent and/or real estate attorney for professional counsel before signing purchase contracts. 

The earnest money you save may be your own.

As mortgage rates lurch higher this week, we have additional proof that cuts to the Fed Funds Rate do not lead to cuts in mortgage rates.

Since the Federal Reserve's surprise rate cut January 22, 2008:

• The Fed Funds Rate is lower by 1.250%
• The 30-year fixed rate mortgage is higher by approximately 0.750%

Mortgage rates are based on the long-term expectations of the U.S. economy.  The Fed Funds Rate is based on the short-term expectation of the U.S. economy. 

They are related in some respects, but certainly not directly.

Even yesterday, as Fed Chairman Ben Bernanke spoke of economic softness and left the door open for future Fed Funds Rate cuts, mortgage rates raced higher on the idea that any FFR rate cuts would lead to long-term inflation