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Why does it matter where my down payment comes from?

I will often have clients ask me, “Why does it matter where my down payment comes from? What’s the big deal as long as I show up at settlement with the cash? Does it matter?” Oh, yes, it does.

Why does it matter?

The whole point of having a mortgage borrower put a downpayment down is to know that this is their hard-earned cash. Or it could be gift money, which is acceptable. That’s not necessarily hard-earned cash. But it’s somebody’s hard-earned cash. And there’s just rules to know where did the money come from and is it from an acceptable source. So there might be things that are acceptable, but are complicated.

A complicated story of raising cash for down payment

I had somebody once that sold an antique guitar collection. But they didn’t have receipts. They some sold some on eBay, they sold some to a friend, they sold some on Craig’s List and had no bill of sales, no receipts. It was a mess. We found a workaround. But that was difficult. So keep paper trail on everything.

Cryptocurrency is something that’s becoming an issue today

You can use cryptocurrency, but the problem is a lot of the cryptocurrency institutions don’t provide proper bank statements. Coinbase, for example. I’ve had clients send me a screenshot of their account balance on Coinbase. Okay, that doesn’t help me. It doesn’t have your name, it doesn’t have an account number, it doesn’t have your address. It’s just not formal looking. It’s something you could have whipped up on your computer with a couple of software programs.

So while you can use cryptocurrency, the bank account statements aren’t formal enough. So I tend to tell people for now, for the time being, stay away from using cryptocurrencies. Hopefully at some point, these cryptocurrency institutions become a little more formal and give you more formal account statement. I have a small account at Coinbase. I’ve never gotten a monthly statement. I have nothing formal. It makes me a little uncomfortable. But that’s something to consider.

Gift money

I’ll have people that will say, “I’m getting a loan from my family.” Okay, well, you can’t get a loan from your family. You can’t borrow money to borrow money. You can’t get a 20% downpayment from your family, that’s a loan, to then go get an 80% loan from us, that’s a 100% loan. Now, you can have your gift giver fill out a gift letter that says, No repayment is implied nor expected. It’s a gift. It’s got to be seen as a true gift.

Now, somewhere down the line, if you want to give them that money back, that’s your own business. But the money has to be represented as a gift. If you sell the house and you make a bunch of profit and you want to give them their their money back, partly or completely, that’s your business later.

Cash advancing a credit card

So where your down payment comes from is really a critical part of underwriting a loan. I’ve had people that say, “I’m going to cash advance a credit card to cover my closing costs. That’s borrowing money to borrow money. That’s a no-no. You can’t cash advance a credit card.

So if your assets aren’t in a very stable account they’ve been there for a while, if you’ve got some creative things going on, better have a conversation with your loan officer before you go for a mortgage pre-approval. Or before you get under contract to buy a home to make sure that you’re not going to get sidetracked in the middle of the transaction. And have you be told, “You can’t use that asset.” And then maybe it’s a problem. So think that through carefully. Thanks.

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