Rising interest rates and economic uncertainties pretty much guarantee that credit is going to be harder to obtain – especially when you’re talking about mortgages.
Lenders are closely scrutinizing every would-be homeowner’s application to make sure that their credit is good, their debt-to-income ratio is safe and their work history is solid.
They’re also looking closely at down payments. Generally speaking, lenders want to see the funds you intend to use at closing in your bank account for at least a few months before they give you a loan – and they want to know where the money came from. This is called “sourcing” the money, or tracking its origins.
Why Does It Matter Where You Got the Down Payment?
To a lot of folks, it seems kind of absurd that lenders are this concerned about how they got the money for a down payment – since the important thing (from the buyer’s perspective) is that the money is there.
Lenders don’t see it that way, for several reasons. They look to the source of the funds because:
- The lender needs to know if you borrowed the money. If so, they need to know the repayment terms, to see if it’s even financially feasible to manage both bills once you have the mortgage you want.
- The underwriter wants to make sure that you have enough money to cover closing costs and protect your investment. If you are borrowed to the hilt in several directions, that could more easily lead to foreclosure in the near future.
- The lender needs to see if you have taken the money from a business account or joint account that’s held with others. If so, they need to know that you had consent from the other party to avoid potential complications down the line (such as allegations of theft or fraud).
- Some loans come with guidelines about down payment money that have to be followed. For example, loans through the Federal Housing Administration permit down payment money to be gifted to the borrower from a variety of sources. In fact, Conventional and VA loans also allow gift funds as well if the lender can establish a relationship with the person giving the gift and the homebuyer.
What Makes a Source of a Down Payment Unacceptable?
With the above information in mind, it’s easier to understand why lenders balk at certain funds. For the most part, unacceptable down payment sources include:
- Cash: You may very well have saved up a lot of cash at home, but you need to let that rest in your checking and savings account for a while before you try to use it as a down payment. It’s very hard to prove where the cash came from – but showing that you’ve had it for a while and aren’t making payments to any secondary lender can help.
- Gifts from the seller, builder, real estate agent or any associated person or business: These are really not gifts but a way to sweeten a deal and get you to buy. In the FHA’s case, that dollar amount they gave you would have to be deducted from the home’s purchase price.
- Cryptocurrency: For the most part, traditional lenders still do not accept cryptocurrency for use as a down payment.
- Mystery money: Maybe you have a generous benefactor, but they want to remain anonymous. That’s a problem because lenders naturally are suspicious that borrowers might be trying to purposefully hide the source of the funds for some reason.
What Are Acceptable Sources of Funds for Down Payments?
Fortunately, the list of sources for down payment money that are acceptable is much longer than the list of sources that aren’t. For the most part, you can use money from any of these places:
- Bank accounts: As mentioned before, it’s helpful if the bank can see the source of your savings (like regular payroll deposits) or when the money has been sitting in your account for a while.
- Retirement accounts: If you’re able to take money out of your 401K or borrow against another retirement fund, that’s often acceptable to the lender (within reason).
- Investments: If you have stocks, bonds, mutual funds or any other investment, you can usually liquidate those and use the money for a down payment.
- Gifts or grants: If you were given money by a family member, your union, a close friend, a charitable organization or through a government agency that offers down payment assistance, that’s broadly acceptable for your purposes.
- Crypto that’s already been converted: If you invested wisely into crypto and you have now exchanged the virtual currency for dollars, that money can now be used for your down payment.
- Gambling proceeds: Did you hit it big at the casino? Are you a regular bingo player who gets lucky a lot? As long as you have the tax records and bank statements to show where your money came from, you can use it for the down payment.
Second mortgages, too, can sometimes be used to provide down payment money on a new home. This often comes into play when someone wants to leverage the equity they have in their current home to buy a second for investment purposes.
It can be hard to know the right move to make with your money, especially when you’re hoping to secure a mortgage loan.
While the above information can help you better understand why lenders source down payment origins and know what’s okay to use (and what’s not), every situation is unique. What money you can use for your down payment may depend partially on the type of your loan and the flexibility of your lender. You will get better insights into your situation by talking to a mortgage expert before you make your next move.