*Disclaimer – Loan guidelines change often and may have changed; be sure to consult with your lender about current requirements.
The two most common mortgage loans, conventional and FHA, both require a minimum down payment along with proper documentation of these monies. If you desire to use one of these programs, here are a few tips on how to meet guideline requirements.
Down Payment Savings Account
A great way to fast track your savings is to set up a separate account for the sole purpose of establishing enough down payment funds. The psychological benefits of a separate account are many. First, you know exactly where you stand in meeting your down payment requirement. Second, keeping your down payment funds separate from your day-to-day spending account, makes it more difficult to inadvertently tap into these funds.
Convert “Mattress Money” into Down Payment Money
Using cash on hand, often referred to as mattress money, is normally not allowed by lenders as a source of down payment. Remember, debt ratio guidelines are strict and the lender must ensure that the borrower didn’t go out and borrow money for their down payment. If you have cash that can be used for your down payment, the easiest thing to do is to get these funds into a bank account at least two months prior to the purchase process. This will make it easier for you and your lender to ensure you will meet underwriting guidelines.
Converting an Asset into a Down Payment
One way to come up with down payment monies is to sell an asset, such as a car that’s paid off. Remember though, you will need to document where these monies came from, so be sure to have a bill of sale, make a copy of the title, and keep a copy of the check used to purchase the item from you. As mentioned above, cash can provide a documentation obstacle, so avoid any issues up front by documenting everything you can if you plan to sell an asset for this purpose.
Prior to tapping into these funds, be sure to get professional advice as to whether this is a smart use of an asset. Additionally, realize that if you convert retirement monies into down payment funds, any payment that results from doing so will likely need to be counted in your debt ratio and can impact your ability to qualify; so be sure to carefully research payment options and speak with your lender on the impact of any new payments.
The gift of a down payment is used quite often and can be a great way to meet down payment guidelines. If you have the opportunity to be gifted funds, be sure to check with your lender that the person gifting you monies is allowed per your loan program. Additionally, take the time to research and understand the tax implication for both you and the person providing the gift.
Is Time On Your Side?
Lenders will normally only require bank statements for the most recent two months as proof of funds; so if you have cash, plan on selling an asset, taking money out of retirement funds, or getting a gift from someone other than a family member, a simple solution is to put these monies into a bank account ninety days or more prior to starting the purchase process. By doing so, these monies will have been in your account long enough to satisfy a lender’s requirement to document down payment monies. In general, if you can show you have the capacity to have held the required monies for an extended period, the original source of the monies isn’t an issue.