Hands down, the number one pitfall to the home loan process revolves around providing proper asset documentation and the actual source of the funds during the loan closing process.
There’s nothing worse in a real estate purchase than making it all the way through the hoops and hurdles just to have a loan denied after the final documents have been signed due to the borrower using the wrong checking account for the down payment.
Seasoning of funds and money used for a down payment are just as important as the source of funds, which is why underwriters typically require seeing at least a 60-day history of funds, or two months bank/asset statements during the mortgage approval process.
Here is a List of Acceptable Sources Of Down Payment Funds:
- Bank Accounts – Both Checking and Savings Accounts
- Investment Accounts – i.e. Money Market, Mutual Funds, and IRA’s
- Retirement Funds – Most 401k programs allow you to borrow against your vested balance in your retirement account for purpose of buying a home
- Life Insurance – Cash value and the face amount
- Gifts – Gifts from family members, employers, and non-profit groups, like your church, are all acceptable sources of a gift
- Inheritance / Trust Funds
- Government Grants/Down Payment Assistance (DPA) – Many state, county, and city agencies offer special down payment assistance programs – qualifications vary from mortgage approval
It is extremely important to make sure your loan officer is aware of the exact source of your down payment as early in the process as possible so that all necessary questions, documentation, and explanations can be reviewed/approved by an underwriter.
A good rule-of-thumb is to remember that whatever funds you’re using as a source has to be pre-approved by your loan officer at the beginning of the home buying process.
Basically, if you accidentally forget to deposit money in your checking account on the way to the closing appointment, it is not acceptable to get a cashier’s check from a friend’s account until you have a chance to pay them back later.
Frequently Asked Questions:
Q: What if I don’t have a bank account and cannot properly source my funds to close?
Cash on hand is an acceptable source of funds for some loan programs. It is best to make sure you bring that detail up at during the pre-approval stage.
Q: Can I use a bonus from my employer for my down payment?
Yes, but generally this needs to be a bonus you regularly receive. If not, it would be considered a gift.
Q: Can I borrow the money from a friend?
No. Unfortunately, any money that needs to be repaid is typically an unacceptable source of funds.