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8 ways to help manage your down payment before an offer

Karen Mayfield
Mortgage Banking

Where do you keep your down payment, while you’re shopping for a house? People ask me this question a lot.

woman sitting on wooden floor using a laptop, with paperwork and calculator nearby.If you’re planning to put 20% down on a house in the $500,000 range, then you’ll have $100,000 burning a hole in your pocket for several months while you shop. Some people may find it hard to resist the temptation to “put their money to work” but I always encourage people to weigh the pros and cons of where they keep their down payment funds. Here are 8 tips on managing your down payment that can help you have a more worry-free close:

Get liquid: Buying a home is a big decision, so why not start preparing early? As a general rule, I encourage people to set aside their down payment funds in a highly liquid, low-risk account 6-12 months before they expect to buy a home. The key is to have the money available and where the principal is not at risk. To help ensure your funds are readily accessible to you when you find a house to bid on, I recommend holding them in a liquid account, such as a checking or money market account.

Freeze: If you hold your down payment in multiple accounts, including cash, gather those funds in one place well in advance of making an offer, and, ideally, 75 days before seeking a pre-approval for a loan. Then, do all you can to keep your funds in one place. Movements of cash will trigger requests for documentation that can delay your closing. In the two months before making an offer on a place, you want the funds in a liquid account, like a checking account. If you use a brokerage account you’ll need to account for the added time to liquidate shares, plus time to transfer funds from the investment account to an escrow or cash account, and you’ll need to provide a paper trail documenting the source of the funds.

Documentation: As you get closer to shopping for a house, something to keep in mind is documentation — such as financial account statements. Transferring your down payment and closing cost funds into a single cash account 75 days before applying for a pre-approval has the added advantage of providing the nice clean documentation — two months of statements — that lenders require.

Have a cushion: When you calculate your down payment, try to have a cushion. If you can, it never hurts to have extra cash during the purchase process. If you’re looking for a $400,000 condo and plan to put down $80,000, or 20%, do you have a plan if your dream home comes in at $410,000? If you have an extra $2,000 in your account, you can still put down 20%.

Know your bank has a cushion: Banks are conservative (in case you didn’t notice). In the mortgage review process, lenders will typically only use 70% of the value of stock holdings. This helps protect you and the lender from potential market fluctuations. If you’re assuming you’ll use your $50,000 worth of Tesla and Facebook shares as a down payment, know that your bank is probably prepared for a bear market and will likely assume you have just $35,000 for a down payment.

The tax man: If you are taking funds from investments to accumulate your down payment and closing costs, talk to a tax expert or do your research to understand the consequences of cashing in your stocks or other investments. You’ll likely want to evaluate long-term versus short-term capital gains, for example.

Don’t get derailed: If for some reason the funds you thought you had for the down payment aren’t going to be available, talk to your mortgage banker as soon as possible. Experienced mortgage bankers can help you determine what options may be available to you. The sooner they know something is up, the better chance they have of helping you come up with a plan to keep your purchase on track.

Be ready to write a check: Remember, too, that you may have some miscellaneous expenses along the way. Any inspections you, as the buyer, want to do, may have to be paid in cash. And when you make an offer on a home, you will likely have to include a check of $500-$1,000, or perhaps more, as a demonstration of your good faith to proceed with the transaction. In California, potential buyers should be prepared to include 3% of their offer price as a good faith deposit.

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