Buying a home generally requires a down payment. While there are programs which require no money down, most have more restrictive income requirements. For the purposes of the broader appeal, most homebuyers need at least a 3.5% down payment (plus closing costs) to get their foot in the door.
In some markets, such as Sonoma County, Calif., (where I work as a mortgage lender), you may need as much as $20,000 to buy a home.
Getting enough money to fulfill these requirements is an important component of qualifying for an affordable mortgage, just like a good credit score. (You can see where yours currently stands by viewing your free credit report summary, updated each month, on Credit.com. You also find tips on how to improve your score here.) But it's also important to decide where you are going to sock away the funds, since this location can mean the difference between a smooth or dicey process.
To ensure it's the former, here are three things you'll want to avoid doing with your down payment.
1. Keeping It in Another Person's Account
Let's say you store your money in your parents' bank account. It's your money; you earned it, but mom and dad manage your finances. If you want to use this money, your folks would have to sign a gift letter, stating the money is donated, so your mortgage company knows it's not another loan.
Even though the money is not technically a gift (it's your money), your lender doesn't view it that way. An account that is yours on paper is considered to be your money. An account that contains funds with another party's name or even your name with that party is going to require more paperwork.
Keep in mind, if the money is true donor funds from mom and dad, they will need to provide that gift letter stating as much as well as a bank statement showing they have the ability to give such a donation.
2. Storing It in Your Safe
Hiding your money at home in a safe away from the eyes and ears of banks does not help your case either. All financial institutions have strong anti-money laundering laws to prevent criminal activity. The money you use to buy a home must be in your bank account for a period of 60 days or the money can be gifted (see above).
Cash deposits from your "side jobs" will almost always create more questions and conditions from your mortgage lender. So, do yourself a favor: if you're serious about buying a home, use a bank account to store your funding.
3. Putting It in Your Primary Checking Account
Checking accounts, believe it or not, can be problematic for homebuying. If you're storing your homebuying funds in a checking account that you use to pay your monthly bills, it can appear on paper like you are spending your down payment! (It can also be problematic if you have donor funds deposited into your primary checking account for the same reason.)
Instead, you can consider keeping the money you plan to use to close on the house in a separate checking account you're not taking money out of. Or a best practice is to keep your down payment funds in a separate savings account that generates little or no activity.
A solid best practice for receiving donor funds is to file the proper paperwork and have the donor wire the gift directly to escrow, bypassing your bank accounts altogether. Doing so will save you time, resulting in a smoother, faster loan process.
If you are trying to buy a home and need guidance, it's smart to talk to an experienced mortgage professional. The homebuying process is always going to be paperwork heavy, but what you do with your money can make the difference between a straight line forward or jumping through hoops.
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