Your credit score, income, and the home’s value play important roles. However, don’t overlook the importance of the down payment. You can’t just tell a lender you are going to put 20% down and expect them to take your word for it. You have to prove where the money came from and that it belongs to you first.
Your Own Savings
If the down payment money comes from your own savings, the lender will require the last 3 months’ of bank statements. On these statements, they will look for irregular and large deposits. If there are regular deposits that occur on a consistent basis, they will not question it.
But, say for example you sold your motorcycle and put the money in your savings account. That’s not a regular deposit and it’s likely a large deposit. The lender will need to know where that money came from. If you have any large deposits similar in nature, you’ll need to provide a paper trail showing where the money originated.
In the example of the sold motorcycle, you can show the deed of sale and the check from the buyer. You can also keep your deposit ticket showing the deposit so that it matches the amount of the check from the motorcycle buyer. Any transaction you conduct should have a paper trail.
If you don’t have a paper trail, the lender will assume the money is a loan. They will then include a monthly payment amount in your debt ratio. This can affect your loan approval. It’s to your advantage to keep as much paperwork as possible for proof.
Stocks and Bonds
Liquid investments can serve as a valuable down payment tool as well. Just like your savings account, the lender will need the last 3 months’ of statements. They will determine the value of your account to ensure that it meets the amount you need to put down on the home.
However, you will also need to show the lender the proof of the sale of the asset once you sell it. You’ll provide the lender with the paperwork you receive for the sale. You’ll also need to prove that you transferred the funds into your account. Keep the deposit ticket from the transaction and provide it to the lender alongside your proof of the asset’s sale.
In extreme cases, you may borrow from your 401K. This isn’t a recommended method because it depletes your retirement funds. Even though you’ll pay the money back, you lose the time value of the compounded interest you would have received.
If you go this route, you’ll need your latest 401K statement. You’ll also need proof that you are eligible for a 401K loan. You’ll need your employer’s approval along with proof of the required payments. Some lenders may count the payment against your debt ratio. It varies by lender. Even though you are paying yourself back and you don’t owe interest, it’s still a debt. Lenders give you a specific timeframe to pay the debt back. This is the same as if you took out a loan from a bank, so the lender will likely count it.
Many loan programs, including FHA and conventional loans allow gift funds for the down payment. You must follow a specific procedure in order to have the funds count.
The donor must provide you with a gift letter. The letter should be signed and dated by the borrower. It should state the amount of money they are gifting. It should also state the reason (home purchase) along with the address of the home. Finally, it should state that this is a gift and not a loan. This is the most important statement to the lender. Again, if it’s a loan, it could count against your debt ratio.
You’ll also need to provide the lender with proof of receipt of the funds. Some lenders also require proof of where the donor received the funds. They may ask for the last 3 months’ worth of banks statements from the donor. The lender will look for any large deposits that throw up a red flag. They’ll also need proof of the funds transfer. You can do this with a canceled check from the borrower and the deposit ticket into your account.
Verifying the down payment isn’t difficult, but it does require a paper trail. Lenders are on the lookout for any red flags that make them think the money is a loan. Even if it is a loan, it doesn’t always mean you’ll lose your mortgage approval. If it fits within your debt ratio, you may still have an approval.
Be honest with your lender about the source of your down payment funds. Ask what proof they will need to source the funds and what timeframe they must cover. Some lenders require more than 3 months’ of bank statements just to make sure the money wasn’t stuffed in your account just to make it look like you had more money.