It’s time to work out how to document the origins of your funds for the down payment and closing expenses after you’ve calculated how much of a down payment you can afford on your home mortgage. “Why do they care where I get the money?” you may wonder. To assess the underlying risk in you as a borrower and to prevent loan fraud, lenders must verify the source of funds. As a result, it’s important for you, the borrower, to keep meticulous track of how the money you want to use as a down payment arrives in your hands. For a variety of reasons, money in your own savings, checking, and money market accounts look best to the bank, and it’s one of the easiest sources of capital to document.
It is also very quick to log money in the bank. The lender has the option of requesting bank statements showing that you have ample funds for the down payment and closing expenses, or undertaking a structured Proof of Deposit with the bank. Most lenders require statements, which can range from 2 to 3 months if you provide full income documentation to up to 24 months if you provide alternative income documentation.
Your lender can bring up the issue of seasoning requirements with you while negotiating your down payment. Money is considered “seasoned” 3 months if it has been in a bank account for 3 months and has been reflected consistently in consecutive statements. Your lender may demand that your down payment be made up of experienced funds and that any major deposits into your bank account be clarified, registered, and possibly disqualified. But start investing and making plans now!
In this regard, some loan types, such as No Asset Verification mortgages or “no assets” loan programs, do not require any documentation. This type of mortgage, as the name suggests, does not require any asset verification; however, lenders normally do not allow borrowers to borrow more than 60% to 70% of the property value without any kind of asset verification. Another type of loan program that has grown in popularity in recent years is Stated Income Stated Assets mortgages, which allow for limited asset verification and allow for up to 75 percent or 80 percent of the property’s value to be loaned to the borrower in some cases.
Buying a home with no down payment, also known as a “no money down” mortgage, has become a popular way for first-time buyers to enjoy the benefits of homeownership without having to put down a significant amount of money. However, borrowers who want a zero down loan will face higher interest rates and monthly payments, as well as statistically higher rates of default and foreclosure.
If you have assets above and beyond the down payment and closing costs on the home and mortgage, you can establish “reserves” with your application, regardless of how much you put down. Having enough cash reserves, good credit, and your down payment sitting in your bank account for a few months can help you qualify for some of the best mortgage programs available, saving you hundreds of thousands of dollars over the course of your loan.
