BUYER’S ARTICLES – FOR THE SMART CONSUMER
In a perfect world, buyers could make a down payment with a check drawn on funds from just about anywhere. However, because of rules, regulations, and lenders’ need to determine how and where the borrower got the down-payment funds, documentation is usually required for the down payment offered by the borrower.
One exception to this is a zero-asset-documentation loan program, which is generally offered only under extreme circumstances by a very small percentage of lenders. With this type of loan, a down payment may not be required.
Let’s look at the types of loans and lenders that do in fact require a down payment from borrowers. Borrowers are required to document where the funds are coming from. Here are some of the most common places from which borrowers get their down-payment funds, as well as the general process that must be followed to document each source:
Savings Account or Checking Account
Although many borrowers choose to invest their savings in more effective investment vehicles, some do keep their extra cash in a checking or savings account. The earning potential is less than that of other types of investments, but documenting funds of this nature is quick and simple. This is good news for both borrowers and lenders.
The general rule for documenting down-payment funds that will originate from a checking or savings account is that they must have been there for at least two or three months. This is known as “seasoning.”
Lenders ask borrowers to provide two or three months of statements for their checking or savings account. Sometimes they may ask for up to six months of statements. This documentation is requested to verify seasoning of the down-payment funds and to review the potential borrower’s saving history, among other reasons.
The lender will probably also ask the borrower to complete a “verification of deposit” form. This form requests the average daily balance over the time period covered by the statements and the amounts of all deposits made into the account(s).
Stock Portfolios, Bonds, Etc.
Individuals receive monthly or quarterly statements (similar to those for a checking or savings account) from their investment brokers, stating the status of their assets. These statements show the borrower’s contributions to the investment portfolio(s) and give the lender information about the borrower’s investing history.
As day trading and individual investing become more common, some borrowers may not actually have investment portfolios with brokerage houses. Instead, they may hold stock certificates. This information can be verified by sending copies of the actual stock certificates to the lender.
Another type of documentation that the lender may request is copies of tax forms. This is because potential borrowers must claim investment earnings and the value of the investment portfolio(s) on their tax returns.
Not all borrowers have access to the cash required to make a 20% down payment, so lenders typically allow borrowers to receive all or a portion of their down-payment funds as gifts from family members. In this situation, the lender asks both the borrower and the giver to sign what is known as a gift letter.This serves as verification of the funds and contains information verifying that the giver has the ability to provide the gift funds. The letter also states that there is no intention of having the borrower pay back the gifted funds.
Gift funds are governed by strict regulations. You must be able to prove a familial relationship with the person giving the gift, or otherwise document a close relationship. In most cases, friends are not allowed to present gift funds to help borrowers cover the down payment on a new home.
401k or Another Type of Retirement Account
Most employers let employees cash out some portion of their retirement account or borrow against their accumulated funds. The largest difference between these two options is that when you borrow against your investment accounts, you will need to repay yourself with interest. The lender will therefore view this as an additional debt payment that you need to make each month, in addition to car payment, mortgage payments and other debt payments. If you cash out funds from your investment account, you will not be required to repay the funds, but be aware that these funds will not be available for your retirement.
Documenting the funds from a retirement account is relatively simple and the process is much the same as that for using funds from a checking or savings account. You will need to provide copies of your quarterly statements and your brokerage house may need to provide a statement of verification to show the history of your investments.
Sale of Personal Property
Depending on your income and the amount that you intend to borrow, the lender may ask you to estimate the value of your personal property. This could include vehicles, art, recreational vehicles, collectibles, family heirlooms and jewelry. In most cases, this property will need to be valued for the lender only if some portion of it will be sold to assist with the down payment.
If you intend to sell some of your personal property to cover the cost of your down payment, the lender will require documentation of the sale. If you sell a car, you can simply provide copies of the original registration papers that list you as the original owner, along with notarized copies of the sales agreement and probably a photocopy of the check that you received for the sale. You should also make a copy of the deposit slip for funds deposited into your bank account.
If you are selling another type of asset to fund your down payment, then you will need documentation to prove the item’s value and record the sale. If you cannot prove that the value of an item was equal to the amount for which it sold, the lender probably will not accept the funds as part of your down payment. You can show value and ownership through original purchase receipts, an insurance appraisal or even a home inventory for insurance purposes. When it comes to the sale of personal property, the more information you can provide to the lender, the better.
Employer Down-Payment Assistance Program
Some employers provide down-payment assistance programs for their employees as an extension of their benefits program. Lenders accept funds that are received in this manner, but you will need to provide documentation in the form of a letter from the employer, a photocopy of the check received, and a copy of the deposit slip.
Every lender is different and has different requirements for the origin of down-payment funds. You should discuss the method you plan to use to come up with your down payment before finalizing any agreement with a specific lender.