First Time Homebuyer Information & Education

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Down payment from Savings

Down payment from Savings - Once you’ve figured out how much of a down payment you can make on your home mortgage, it’s time to determine how to document the source of your funds for the down payment and closing costs. Now you might be saying, “Why do they care where I get the money?” Lenders need to verify the source of funds to both assess the underlying risk in you as a borrower as well as to prevent loan fraud. This makes it imperative for you, the applicant, to maintain complete and detailed records of how the money which you plan to use for a down payment makes it into your hands. Money from your own savings, checking & money market accounts looks best to the bank for a variety of reasons, and is amongst the easiest sources of capital to document.

Money in the bank is also very easy to document. The lender has the option of asking you to submit bank statements to them indicating that you have the money for the down payment and closing costs, or performing a formal Verification of Deposit directly with your bank. Most lenders ask for statements, generally 2 to 3 months if you are providing full income documentation or up to 24 months if you are providing alternative documentation of income.

When discussing your down payment, your lender may discuss the topic of seasoning requirements with you. If you have money in a bank account for 3 months and it reflects consistently in consecutive statements, that money is considered “seasoned” 3 months. Your lender may require that your down payment money be comprised of seasoned funds, and that any large influxes of capital into your bank account may have to be extensively and thoroughly explained, documented, and potentially disqualified. So start saving and plan ahead!

There are loan types which do not require any form of documentation in this regard, particularly No Asset Verification mortgages or “no assets” loan programs. Just as it sounds, this type of mortgage does not require any verification of assets, however most lenders generally do not allow the applicant to borrow more than 60% to 70% of the property value without some form of asset verification. There is another type of loan program which is increasingly popular over the last few years called Stated Income Stated Assets mortgages, which allows for limited verification of assets, and some of these programs allow up to 75% or 80% of the property’s value to be loaned to the borrower. There are certain specialty programs which will allow as little as a 3% downpayment with limited to no asset verification

Buying a home with no down payment, often referred to as a “no money down” mortgage, has become a popular way for first time buyers to enjoy the benefits of homeownership without substantial savings, however it is important to note that borrowers who want a zero down loan will be faced with higher interest rates and monthly payments and are statistically shown to have higher rates of default and foreclosure.

No matter what you decide to put down, if you have and can document assets above and beyond the down payment and closing costs on the home and mortgage you can establish “reserves” with your application. Having ample capital reserves, good credit, and your down payment sitting in your bank account for a couple of months can in combination help you qualify for some of the best programs available, and potentially save you hundreds of thousands of dollars over the life of your mortgage.

Down Payment from Stocks & Bonds - When you start thinking about buying a home, the first thing you should be considering is your down payment and cash for fees and closing costs, and then you’ll have to show your lender how where you got the money for the down payment. The best place to start the process is by documenting and verifying the contents of your checking, savings and money market accounts at your bank. But for those of you who have most of your money invested outside of your checking and savings, you may wish to look to your brokerage account and its contents: stocks, bonds, mutual funds etc., to show your lender the money. Still in many cases it may not be advisable to liquidate well performing investments to make a down payment.

If you have a brokerage account in good standing, documenting these assets is simple. Open up your filing cabinet and find the most recent statement of your account. Your lender will likely require that you need a current (thirty to ninety day old) brokerage account statement for documentation of the assets.

If you own shares in a mutual fund or any stocks or bonds which were purchased outside of the brokerage account, please produce hard copies of any proof of ownership and submit copies to your lender clearly explaining the situation. For example, if you have 1,000 physical stock certificates of Berkshire Hathaway A gathering dust in a safety deposit box or fireproof safe somewhere, you’ll want to take photocopies of the certificates and if necessary get a letter from the company’s registrar confirming your ownership of n number of shares of the company in your name. The same is true of all instruments which you may have physical copies of, but it is important to note that shares of private companies will not benefit you in verifying your assets for the lender. Mutual funds often provide separate statements which you can produce for your lender’s satisfaction. Be sure to present statements which are no more than 30 days old.

So everything we’ve talked about so far refers to the verification of assets, but if you are planning on selling all or part of these stocks, bonds, mutual funds or any other securities to make a down payment or pay for fees and closing costs on your new home and mortgage respectively, it is critical to keep every single piece of paper, email, bank to bank wire / telex, or other communication which documents the sale or other liquidation of the assets and any receipts which show how you got paid for raising money against or through these assets. Be thorough, be detailed, because most lenders will be obligated to ask you a lot of questions about the liquidation of such assets to cover a down payment on your new home or closing costs on your mortgage.

If you deposit funds from the sale of securities, including stocks, bonds and mutual funds into a savings, checking or money market account, try to put the money in the same bank where you are keeping most of your accounts, which will simplify matters and make it easier to substantiate the sudden influx of cash from the sale. And hang on to those receipts!

Stocks, bonds and mutual funds are an excellent source of capital for the purposes of establishing that you have reserves of assets which could be used in emergency situations such as unemployment, disaster or injury, however it is difficult to recommend liquidating these assets for use in marginally reducing your rate of borrowing on a home loan. Generally, it is best to discuss the matter with your financial advisor to weigh the comparative performance offset between the appreciation of these investments against whatever savings you might realize by liquidating them for use as a downpayment.

 

Information listed above is to be used for educational purposes only and is not guaranteed

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