The old adage “Cash is king!” may be true in some scenarios, but it doesn’t apply when buying a home. If you’re planning to get a mortgage you cannot use actual cash money for any of the down payment or closing costs. All funds used in your mortgage transaction need to be “source-able”; In other words, it needs to be clear where these funds originated from.
If you have started setting aside funds for a down payment, make sure you are setting it aside into a bank account. Any assets being used in your home-buying transaction will require review of financial statements going back at least 60 days. Any deposits on those statements deemed suspicious by your mortgage underwriter will require documentation as to where they originated from.
Like most rules and regulations, this one was put in place because people misbehaved. Shocking, I know! From borrowing money for a down payment to money laundering of illegally gotten gains, your lender needs to know that all the funds involved in your home-buying transaction are legitimate and did not result in undisclosed debt which could impact your ability to repay your mortgage.
I have recently encountered multiple instances of people keeping very large sums of cash at home to save for their down payment. In some cases this led to a significant delay in their ability to purchase a home! If you struggle to save, instead of taking part in a “piggy bank challenge”, which dictates putting money into an actual piggy bank that you cannot access without breaking, try opening a savings account at a different institution from your checking account. That way you cannot do a simple transfer during a moment of weakness. In fact, if your employer pays you via direct deposit, you can even set up a specific amount of your check to be diverted to this other account automatically. Out of sight, out of mind!
This same rule applies for any family members who may be considering providing a financial gift toward your down payment or closing costs. For conventional loans, all that is required documentation to confirm funds came from an account that is owned by the gift donor, but if you’re getting a government loan (FHA, VA, USDA) the requirement is a 30-day transaction history to confirm those funds belonged to the donor for at least the past 30 days. Any transfers from other accounts will necessitate a similar printout from those accounts, so you see things can get very complicated when cash is involved.
The best course of action is to always get with your mortgage loan officer well in advance of shopping for a home so they can address all requirements, get a preview of your scenario, and explain the loan process to you. An experienced loan officer knows what can and cannot be explained away. Always work with a loan officer you feel comfortable with; someone you can provide full transparency of your situation to in a proactive manner. This early trust relationship will set you up for a smooth, more stress-free transaction.
Have any friends, family, or co-workers with mortgage needs? Be sure to send them to the Mortgage Dogs! We won’t drop the ball.
