Where are your down payment funds coming from?

Posted on February 24, 2016 by Ray Williams (NMLS #216267).

Knowing where your down payment funds are coming from is only half the equation. Being able to source and show is the second part. As a lender we see all sources of money being used for down payments. Some of which include but are not limited to; 401k’s, gift funds, stocks, mutual funds, savings bonds and sale of assets (see upcoming blog on sale of assets) and of course savings and checking accounts.

The question you need to ask yourself is “if you needed the money today, to close on your home, is it liquid, could you withdraw the funds?” If your answer is no then there are steps you need to start preparing while out looking at houses.  Sure, we can see your 401K statement, and know you have money to draw from. But how long will this take you to physically get the money? You may be asking yourself why this would be important and why it would be necessary to have before you even go under contract.  Well I’m here to explain the importance, also please keep in mind that cash is not an acceptable source of funds!

Your lender will need to be able to verify liquid assets, the funds that will be used for your down payment and closing costs (including earnest money) as liquid for loan approval with the underwriters. If the funds are not in your primary bank and liquid (able to be withdrawn that day) then technically we are unable to give you a complete approval to be able to close on your house.

So you can see, the money has to be there early in the process, and best bet is by when you go under contract.  Again, because the underwriter can’t give you credit for money in a 401K for closing, if it is not liquid. Same as they can’t give you credit for grandma’s gift funds if grandma still hasn’t physically transferred you the money (and lender has verified all necessary documentation on transfer). Now here are the steps you need to take if they are not readily available in your primary checking/savings account (The one you will draw from at prior to closing for monies used to close on your home):

  • 401k funds– You will need to find out and obtain the terms of withdrawal for your 401k funds, then start the process for getting the funds into your account.  
  • Gift funds– These funds preferably need to be sent by a wire transfer and should have the banking information included from whom/where they came from. This is because it will be easier to source and document. Cashier checks & personal checks are acceptable but keep in mind they’ll add additional documentation requirements to your approval process. Bear in mind different loan programs have different gift documentation requirements. So in short, make sure the person gifting the money is available and ok with assisting with the lender’s needs through the process. If they are not, or delay, your approval can be delayed or their gift funds may not be an eligible source of funds for closing.
  • Stocks/Mutual Funds– You need to know prepare yourself for any time needed in order to liquidate and transfer into your primary checking/savings account for those underwriters to approve as usable funds for closing.
  • Savings Bonds– If you know you are going to be using these for your purchase than you need to get them cashed into your account so they are liquid as well. The lender will also need copies of the documentation from when you cashed them in, with your bank.
  • Sale of Assets (will have an upcoming blog on these to go over more in depth)– Just remember that you will need to document the sales and be able to paper trail the transaction.

Bottom line, when moving/transferring funds from accounts and preparing your funds to be used as down payment on a purchase, it helps to have the funds readily available in your account well before you start looking at properties.  It is advised that this should not be done last minute while you are under contract for a property.  These are important funds and if not documented timely as liquid (remember underwriters need to see liquid money) can cause you to not close on time or worse, not close at all.
For more information and if you have any questions please give us a call.

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