What to know about down payment and asset reserve options

Victor Polich
Posted by Victor Polich
Mortgage Banking

What homebuyer doesn’t want a mortgage process that’s as smooth and stress-free as possible? One thing you can do to help ensure it goes smoothly is make certain that all of the funds you plan to use in the purchase transaction come from acceptable sources and are documented correctly.

Young blonde woman sitting at a dining room table, looking over several pieces of financial paperwork.Acceptable sources for the down payment

There are many sources of funding you can tap into for your down payment. But it’s important to know that down payment requirements differ slightly for some lenders, such as Fannie Mae, Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and U.S. Rural Development loans. Also, remember that lenders must verify your funds to guarantee they are acquired from an acceptable source.

Here are three major sources of assets for a down payment:

1. Liquid assets (checking, savings, and/or money market accounts)

  • You must provide your two most recent bank statements. If unavailable, lenders will obtain a Verification of Deposit (VOD) from your bank, which provides the overall balance of your accounts.

2. Investments or retirement savings (such as stocks, bonds, IRAs, and/or 401(k)s)

  • The value of your investments will need to be documented with statements, bond copies, or stock certificates and current data on value.
  • Your Retirement Plan Administrator can help you determine if you can get a 401(k) loan or cash out some funds for a primary home purchase. Please consult your tax or legal advisor for more information regarding your personal situation.
  • Typically, lenders will consider only up to 60% of the value of assets — if you’re over the age of 59.5, 100% of funds can be used.

3. Gift funds

  • Gift funds can be used for your entire down payment when purchasing a primary residence with an FHA or conventional loan. Donors must have available funds to give, and you’ll need to provide a copy of the gift check(s) and proof of deposit into an account.

Some sources cannot be used for your down payment and reserves. Examples of these include:

  • Actual physical cash on hand, which are funds not held in a bank account
  • Cash advances on credit cards
  • Loans against household goods and furniture
  • Unsecured loans
  • Any large deposits that are not verified by supporting documentation from a financial institution or legitimate depository entity showing transference of these funds into the current account of record
Assets for reserves

In general, the more reserves you have accumulated, the stronger your finances — which may help with a mortgage loan approval. Reserves are liquid or near liquid assets that are available to a borrower after the mortgage closes.

1. Liquid assets (checking, savings, and/or money market accounts)

  • For FHA loans, there is no reserve requirement, but reserves may be required on owner-occupied three- to four-unit buildings.
  • For conventional loans, gift funds can be used for some loan programs.

2. Investments (IRA and/or 401(k) accounts)

  • If gift funds are used for reserves, donors must have available funds to give, and need to provide you with a copy of their check and proof of deposit into an account.

Having a clear understanding about your funding sources for a mortgage, as well as being able to keep funds in reserve, may help speed the process in getting a loan. If you have further questions, I encourage you to contact an experienced mortgage professional who might help you avoid delays regarding your fund sources.

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