Here are the types of funds you can (and can’t) use for an initial deposit for your home purchase.
Buying a home is an exciting opportunity! As you consider purchasing a house, one of the first factors to think about is your down payment.
A down payment is the portion of your new home’s cost you pay upfront. Some mortgage loans require a certain percent down (typically anywhere from 3 to 20%) and others require none at all. There are, of course, perks to providing a down payment, such as a lower mortgage amount (therefore a lower monthly payment) or avoiding private mortgage insurance (PMI).
What Can I Use for My Down Payment?
- Funds from checking and/or savings account
- Money from the sale of your existing home (if applicable)
- Gift funds
- Funds from a 401(k),IRA, or other retirement accounts
- Down payment assistance
- Proceeds from stocks and bonds (we highly recommend consulting with your financial advisor to understand the tax implications if you decide to go this route for your down payment funds)
What Can’t I Use for My Down Payment?
- Cash saved and stored in your home, safe, etc.
- Cash earned from garage sales
- Unsecured borrowed funds (such as payday loans, signatures loans, or an advance on a credit card)
Down Payment Asset Breakdown
The most common source of down payment is using funds from your checking or savings accounts. This can be money you’ve saved up for years, or fairly recently, but your loan originator will need to see 2-3 months’ worth of bank statements to verify your financial activity. You could also pull from your 401(k) or IRA to fund your down payment, but we recommend chatting with your financial advisor before making any big financial moves like this.
If someone plans to gift you money for your down payment, you must document the money before it’s given to you — your loan originator can give you a template. This is formally called a gift letter; at Waterstone Mortgage, we provide a gift letter that you can complete with the details .
Also note that some types of mortgages require you to provide at least a portion of the down payment from your own funds (not from a gift), so you’ll want to check with your loan originator to make sure you meet the requirements for the specific loan you’re applying for.
There are also plenty of down payment assistance programs available. Many are state specific and have income or purchase price limits, so find a loan professional in your area to determine what you’re eligible for. Oftentimes, you can use these funds for down payment and/or closing costs, so be sure to discuss your options with your loan originator!
On the other hand, you can’t use straight up cash you have stored under your mattress. If you do have money saved this way, get it in the bank as soon as possible — it needs to be “seasoned,” or in your account for at least 60 days prior to use. Gift funds are an exception to this rule, which is why they need to be formally documented.
You’re probably seeing a trend here — funds for a down payment can’t just come out of nowhere. It’s important for your lender to understand where the money came from, to ensure that you will have the capacity to make your mortgage payments in the future.
On a related note, it’s also crucial to maintain a strong credit score as you’re planning to buy a home. While you’re saving for a down payment, be sure to pay your bills on time and keep your credit card balances low.
The bottom line? If purchasing a new home is on your radar, it never hurts to start saving as early as possible. Worst case scenario is you end up with some extra money in the bank! If you have any questions about your specific situation, you can always contact a local mortgage expert in your area. One of our experts can walk you through the entire down payment process.
The information provided above is intended for informational purposes only and in no way constitutes legal advice or credit counseling.
