SANTA CRUZ (February 21, 2009) - The good news is that today’s mortgage industry is alive and well and there is plenty of mortgage money to around. The harsh reality is that it takes cash, sound credit, and documentable income to qualify to buy a home. For those who are fortunate enough to own their homes and are seeking to refinance, equity has always been a standard requirement. Equity is what’s leftover after a homeowner subtracts what they owe on their home from what it is worth.

However, under the new mortgage relief plan outlined by President Obama in Phoenix on Thursday, even a borrower who owes up to 105 percent of the value of his or her home may be able to refinance! Although this plan is scheduled to take effect next month, the details of who will qualify have not been clarified.

Generally, borrowers understand and accept the requirement to document income. Those who are employed by others must be prepared to provide 30 days of current paystubs, 06 & 07 federal tax returns and 06 & 07 & 08 W-2s. An employee’s gross income is used to calculate whether or not they qualify for the mortgage.

Those who are self employed must also provide the two most recent years of tax returns and, of course, there are no paystubs or W-2s. It is the average of two years of the net profit at the bottom of Schedule C of their federal tax return that is used to determine whether or not they qualify for the mortgage they are seeking. Depreciation and home office expenses may be added in to increase their income.

It is the tracking of the cash that is the biggest headache of all. It seems as though it never fails that those who are preparing to buy a home start moving their money around to, I guess, get it ready to eject it out of their accounts and into the purchase transaction for a new home. Given the fact that the mortgage industry is super sensitive about the source of the money that the buyer uses for the down payment and closing costs, this movement of funds becomes a huge nightmare.

The amazing thing is that the mortgage industry only asks for the two most recent months of a prospective borrower’s bank accounts to verify that there have been no unexplained injections of cash. Unfortunately, each movement of funds from one account to another looks like a suspicious deposit. Each one of these money movements must be documented to prove that the borrower had the money in one account and then simply moved it to another account.

Money coming from gifts from a relative is, in most cases, accepted but must be documented as a gift. Usually a gift letter with the donor’s name, address and phone number is all that is required. That is, as long as the gift funds can be traced back to the donor’s account and then tracked into the borrowers account or escrow. The best way is by way of a cashier’s check that clearly states the donor’s name and the borrower’s name or escrow account. FHA will require a bank statement from the donor to demonstrate the ability to provide the gift.

The same type of documentation is required in the case of a homeowner who must bring cash into a transaction in order to get a lower loan amount or pay for closing cost. Whether a purchase or a refinance, it is critical that the funds brought in to the title company to close escrow come from accounts that are listed on your loan application and documented in your file.

Lenders will simply not allow a transaction to close if the cash has not been adequately tracked! Remember, as you are dealing with the frustration of documenting the movement of your cash, it is not your mortgage professional that is to blame, it is the entire mortgage industry.

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.