Providing proper asset documentation and the actual source of the funds is a critical element of the loan closing process.
There’s nothing worse in a real estate purchase than making it all the way through the hoops and hurdles just to have a loan denied after the final documents have been signed due to the borrower using the wrong checking account for the down payment.
Seasoning of the down payment money is just as important as the source, which is why underwriters typically require at least two months bank / asset statements in the initial mortgage approval process.
A Few Acceptable Sources Of Down Payment Include:
- Bank Accounts – checking / savings
- Investment Accounts – money market, mutual funds
- Retirement Funds – keep in mind that borrowing against a 401K plan will require a repayment, which will be calculated in the Debt-to-Income Ratio
- Life Insurance – Cash value and face amount
- Gifts – Family members can gift down payment funds with certain restrictions
- Inheritance / Trust Funds
- Government Grants – Many state, county and city agencies offer special down payment assistance programs
It is extremely important to make sure your loan officer is aware of the exact source of your down payment as early in the process as possible so that all necessary questions, documentation and explanations can be reviewed / approved by an underwriter.
A good rule-of-thumb to remember is that whatever funds you’re using as a down payment have to be pre-approved by an underwriter at the beginning of the mortgage approval process.
Basically, if you accidentally forget to deposit money in your checking account on the way to the closing appointment, it is not acceptable to get a cashier’s check from a friend’s account until you have a chance to pay them back later.
Frequently Asked Questions:
Q: What if I don’t have a bank account and cannot properly source my funds to close?
Cash on hand is an acceptable source of funds for some loan programs, but make sure you bring that detail up at the application stage
Q: Can I use a bonus from my employer for my down payment?
Yes, but generally this needs to be a bonus you regularly receive
Q: Can I borrow the money from a friend?
No, any money that needs to be repaid is typically an unacceptable source of funds
Related Articles – Closing Process / Costs
What the heck are they talking about?
Many borrowers go through the closing process in a haze, nodding, smiling, and signing through a bunch of noise that sounds like Greek.
Even though you may have put your trust in your real estate and mortgage team, it helps to understand some of the terminology so that you can pay attention to specific details that may impact the decisions you need to make.
Common Closing Terms / Processes:
1. Docs Sent –
Buyers sit on pins and needles through the approval process, waiting to find out if they meet the lender’s qualification requirements (which include items such as total expense to income, maximum loan amounts, loan-to-value ratios, credit, etc).
The term “docs sent” generally means you made it!! The lender’s closing department has sent the approved loan paperwork to the closing agent, which is usually an attorney or title company.
Keep in mind that there may be some prior to funding conditions the underwriter will need to verify before the deal can be considered fully approved.
2. Docs Signed –
Just what it implies. All documentation is signed, including the paperwork between the borrower and the lender which details the terms of the loan, and the contracts between the seller and buyer of the property.
This usually occurs at closing in the presence of the closing agent, bank representative, buyer and seller.
3. Funded –
Show me some money!
The actual funds are transferred from the lender to the closing agent, along with all applicable disclosures.
For a home purchase, if the closing occurs in the morning, the funds are generally sent the same day. If the closing occurs in the afternoon, the funds are usually transferred the next day.
The timing is different for refinancing transactions due to the right of rescission. This is the right (given automatically by law to the borrower) to back out of the transaction within three days of signing the loan documents. As a result, funds are not transferred until after the rescission period in a refinancing transaction, and are generally received on the fourth day after the paperwork is signed.
(Note – Saturdays are counted in the three day period, while Sundays are not). The right of rescission only applies to a property the borrower will live in, not investment properties.
4. Recorded –
Let’s make it official. The recording of the deed transfers title (legal ownership) of the property to the buyer. The title company or the attorney records the transaction in the county register where the property is located, usually immediately after closing.
There you have it – an official translation of closing lingo.
As with any other important financial transaction, there are many steps, some of which are dictated by law, which must be followed.