Anatomy of a Down Payment
When you decide to purchase a home, one of the first
questions you’ll be asked when it comes to financing is, “How much of a down
payment can you make?” The down payment
is the amount of money you put towards the purchase price of a home including
the percentage down plus closing costs.
If you would like to put 10% down toward a $300,000 purchase price and
your closing costs are $4,000, the total funds needed would be $34,000. Some lenders may also require “reserves”
which is extra cash or assets you have after the closing. Reserves ensure that you have a financial
cushion in case of any unforeseen circumstances that might impact your income
or expenses.
Most conventional loans require a minimum down payment of at least
5% from the borrower’s “own” funds. Some special loan programs such
as those provided through IHDA, FHA or USDA do not have a borrower “own” funds
requirement. Your mortgage consultant
will guide you through the program differences to choose the best option for
your situation.
Borrower's "own" funds are those funds which have been in the borrower's bank accounts for over
two months as verified by the most recent two months' statements without any large deposits
appearing. Large deposits are defined as a single deposit that exceeds $1,000 or is sometimes
tied to a percentage of your total monthly qualifying income for the loan. Generally speaking,
large deposits are acceptable under some circumstances as described further in this newsletter.
Borrower's "own" funds are those funds which have been in the borrower's bank accounts for over
two months as verified by the most recent two months' statements without any large deposits
appearing. Large deposits are defined as a single deposit that exceeds $1,000 or is sometimes
tied to a percentage of your total monthly qualifying income for the loan. Generally speaking,
large deposits are acceptable under some circumstances as described further in this newsletter.
So, what types of assets are eligible for your down payment
and what are some red flags to watch out for?
To help you understand the types of assets that are considered eligible
to apply toward your down payment, I created this guide for easy reference.
1. Bank Accounts: Bank accounts include savings accounts,
checking accounts, certificates of deposit, and money market accounts to which
you have immediate access. Lenders need
to review at least your last two months bank statements prior to your loan
application. If you receive quarterly
and yearly bank statements that are more than 30 but less than 90 days old,
they will be accepted as long as you can verify that the funds are still
available. If you have a joint bank
account and one or more of the account holders are not part of your loan
application, you’ll need to provide a signed letter from each of those holders
confirming that you have access to all of the funds in the account.
Large, non-payroll deposits, typically larger than $1,000,
need to be sourced. If the large deposit
is not from the borrower’s “own” funds, they may or may not be accepted as
eligible assets to use toward the down payment.
Some examples of deposits to be questioned and verified are: secured loans, business assets, gift funds,
reimbursements, proceeds from the sale of assets, transfer of minor accounts,
and trust funds.
2. Secured Loans: Any borrowed funds must be identified for
down payment eligibility as an acceptable source. Generally speaking, any funds borrowed and
secured against borrower’s “own” assets are eligible. For example, if you borrow funds from a 401k
account, these are acceptable funds for your down payment.
3. Business Assets: May be an acceptable source of funds for
down payment, closing costs and financial reserves when a borrower is
self-employed and the individual federal income tax returns have been
evaluated by the lender, including, if
applicable, the business federal income tax returns for that particular
business. The borrower must be listed as
an owner of the account and the account must be verified. The lender will request a business cash flow
analysis from your accountant to confirm that the withdrawal of funds will not
have a negative impact on the business.
4. Gift Funds: Gift funds from a relative are usually an
acceptable source of funds, however, the lender must perform an evaluation to
quantify how much of the down payment must be from the borrower’s “own” funds. For example, let's say the purchase price is $200,000 and the borrower wishes to put down 10%. The minimum down payment from borrower's "own" funds is 5%, or $10,000. The remaining $10,000 plus closing costs may come from gift funds. If borrower is making a 20% down payment, all funds may be from a gift. If acceptable, the gift must be verified by a
donor’s gift certificate and paper trail showing the transfer of gift funds.
5. Wedding Gifts: May be acceptable with a copy of the wedding
certificate and invitation.
Acceptability is conditioned upon the underwriter’s judgment based upon
a number of other underwriting factors including debt ratios, credit score, and
percentage down.
6. Stocks, Stock Options, Bonds and Mutual
Funds: Vested assets in the form
of stocks, government bonds, and mutual funds are acceptable sources of funds
for the down payment, closing costs and reserves provided their value can be
verified. The lender must verify the
borrower’s ownership of the account or asset.
The value of the asset and any related documentation must meet
underwriting requirements and the asset must be liquidated prior to closing and
the paper trail submitted for approval.
7. Retirement Funds: These include IRA, SEP IRA, 401(k), KEOGH,
and other IRS qualified retirement plans.
They may be verified with a copy of the most recent monthly quarterly
statement which states that you are the account owner, as well as the value of
the account. If you will be liquidating
the funds, this will need to be done prior to closing and the paper trail
documented. Watch out for penalties
which can equal at least 10% of your balance plus taxes on the withdrawn
funds. If you are borrowing from a
401(k), the lender will need to see the note and terms of your loan and the
paper trail for the deposited funds.
When funds are used to meet reserve requirements, you aren’t required to
withdraw the funds from the account. All
retirement accounts require written conditions under which borrower has access
to the funds.
8. Individual Development Accounts (IDA): An IDA is a matched savings account that
helps people save towards the purchase of a lifelong asset, such as a
home. If you have one, you must have
regularly deposited money that is matched by a municipality, non-profit or
religious organization, your employer, or a regional Federal Home Loan
Bank. IDA’s may be used to meet down
payment requirements.
9. Trust Accounts: Funds disbursed from a borrower’s trust
account are an acceptable source for the down payment, closing costs and
reserves provided the borrower is the beneficiary and has immediate access to
the funds. All trust accounts require
written conditions under which borrower has access to the funds.
10. Net Proceeds from Sale of Real Estate: If you currently own a home that is listed
for sale that will close prior to your purchase, your lender will allow the net
sales proceeds to be used towards your down payment. Generally speaking, the lender will use 90%
of the sale price minus your mortgage balance.
11. Sale of Personal Property: You can use the proceeds from the sale of
your personal property as a source of funds for down payment, closing costs and
reserves. An example would include the
sale of a car or musical instrument. The
bill of sale, closing statement and verified deposited funds are required.
12. Cash Value of Life Insurance: This may be an option if you have an
insurance policy that accumulates value (sometimes called a “whole life
policy”). You may be able to use some or
all of the policy’s value toward down payment, closing costs and reserves.
13. Bridge Loans: If you happen to have a home for sale, some
bridge loans are a form of second mortgage secured by your current home. By using funds from this loan, you may be
able to close on a new home before selling your present home. In other words, bridge loans help “bridge”
the gap between money that you expect from sale proceeds of your current home
and money applied toward your new purchase loan, when there is a time gap
between the two transactions. Your
mortgage consultant will help you understand if you are eligible for this type
of financing.
14. Foreign Assets: If you’ve been employed or have maintained
accounts overseas, you can use these funds, provided certain requirements are
met.
15. Note Receivable: In layman’s terms, a Note Receivable is an
IOU. Officially, it’s an asset that
contains a written promissory note from another party. For example, if you lent someone money and
they have repaid the loan, the note and paper trail of repaid funds going into
your account will be required for eligibility.
If you need more information or would like assistance
determining if your assets are eligible to be included as your down payment, I
would be happy to help you! Please
contact me at:
Diane Pyshos, Senior Mortgage
Consultant
A & N Mortgage Services,
Inc.Email: dianep@anmtg.com
Phone: 312-909-9718
Licensed in IL, IN and MI
NMLS #137800 Company ID #19291
Note: There may be tax implications or penalties
associated with liquidating certain accounts.
Please consult your accountant for further guidance. We do not provide tax advice. We are not a licensed insurance agency. There may be penalties and tax implications
associated with surrendering your policy.
Please consult with your insurance provider and accountant for
additional guidance.
[1] Borrower’s “own” funds are those funds which
have been in the borrower’s bank accounts as verified by the most recent two
months’ statements without any large deposits appearing (typically larger than
$1,000). Generally speaking, large
deposits are acceptable if they are eligible secured loans, eligible gift
funds, verifiable reimbursements, verifiable loan repayments, and eligible
business funds. The list of acceptable
funds is contained in this newsletter.
