Many of my clients are first time homebuyers, which gives me the opportunity to help guide them through their purchase. With changing banking laws at both the federal and state level, the rules that mom and dad followed to qualify for their mortgage may not apply anymore. At least not the ones that relate to contract deposits and down payments. The following are what I find to be the top four things that most homebuyers don’t know about deposits and down payments.
1. Contract deposits must be sourced, which means that “mattress money” is unacceptable.
Mattress money is a term used to describe the large cash deposits borrowers make into their bank accounts to at a single time or in unusual intervals. These deposits are problematic because the lender cannot readily determine where the funds came from. Perhaps the funds came from an uncle who expects to be paid back in full, or, alternatively (and this is the lender’s concern), perhaps the funds are the result of money laundering or revenue from illegal business operations.
Many people keep rainy day funds in their homes for emergencies while others may choose withdraw from their bank accounts every payday in order to save for their down payments, but a lender will request bank statements for at least two statement cycles when reviewing your loan application and an out of the ordinary, large cash deposit will need to be explained with documentation to evidence its origin. A lender must disregard a large cash deposit that cannot be sourced, meaning that you will not be able to use those funds for your closing.
2. Similarly, money that you receive as a gift must also be sourced.
When mom and dad offer to help you with your down payment by giving you some or all of it as a gift, your lender will require a gift a letter as well as evidence from your parents of where the funds came from. The guidelines for sourcing gift funds are basically the same as the guidelines for sourcing your own deposits, which means that if the funds look like they just appeared in your parents’ account, the funds cannot be used for your purchase.
3. The down payment due at closing will include expenses that you may not have thought of.
When considering whether to buy a home, most people look at their income and consider how much of a monthly mortgage payment they can make. Lenders consider a buyer’s ability to monthly payments as part of their loan approval process too, but they must also consider a buyer’s ability to make the payments that are due at closing. Those items include a year’s worth of homeowner’s insurance, 3 months worth of property taxes and homeowner association fees (if purchasing a condominium unit or townhouse). These items can give a buyer sticker shock because they expected to only pay the balance of the purchase price at closing.
4. Contract deposits and down payments must be made by check.
This all comes back to sourcing requirements but it also makes good, logical sense. When making any payments toward your home purchase, use checks and never offer to send cash. A contract deposit can usually be made by personal check, unless your contract of sale requires certified funds. Down payments that are due at closing must be made by certified funds, which can either be a cashier’s check or bank wire. Regardless of the amount of your down payment, you cannot (and should not) bring cash to closing.
I use a collaborative approach to representing clients in a home purchase, having good communication with a client's lender makes the process run smoothly and gets you in your new home faster. When my clients have questions about lender requirements, I am always available to discuss them or reach out to the lender directly. Closings can get frustrating and my office is happy to help!