When you apply for a mortgage, one of the most important issues the bank will examine is whether you have a down payment and how much it is. Even a small one will have an impact on the loan .
So how do I get a down payment if I want to purchase a home?
There are many different ways to obtain a down payment for your home. There are the standard, usual ones, but there are others that most people don’t know about but I have learned about during the many years I have been advising my clients regarding their mortgages. Basically, there are three methods. : A. Your own moneyB. A gift from a relative C. Funds obtained from other people or in a different way
The most usual form of down payment is funds that the borrower himself already has and can put down on a property. In other words, the person who is requesting the mortgage and who will own the property will supply the money for the down payment himself. This can be from various sources:
• The savings of the borrower. This money may come from a bank account, from investments that are not locked in as retirement funds, or other assets that can be made liquid.( i.e. stocks, bonds, 401K, anuity, trust accounts).
• Life insurance cash value: Some life insurance policies have a cash value tied to them and the insured can borrow against this cash value and create a down payment for the purchase of a home.
• Refinancing: It is possible to refinance a property that you already have to create a down payment on a new purchase. The down payment that comes from a refinancing is not treated as a loan since you are withdrawing assets you have in your own property.
• Collateral guarantee: It is a bit complicated, but it is possible, in certain situations, to pledge the equity in another property (mortgaged or not) as a guarantee for the purchase of another property. It is in fact a deposit with a collateral guarantee on another property that you own.
The vast majority of lenders require that the down payment be in your possession for the prior 90 days. It is one of the methods that they use to comply with government requirements aimed at preventing money laundering.
All of this says that if you have your money in cash (under the mattress) you will risk your lender not being comfortable with your down payment.
It often occurs that one receives a gift to be used as a down payment. This is acceptable, provided that the gift comes from a family member (spouse, child, parent, brother, sister, grandparent or sometimes an uncle or aunt)
This kind of a gift has to be accompanied by a “gift letter”. This is a letter that stipulates that the money is a gift and not a loan that has to be repaid.
Most lenders insist that the gift funds are deposited into the bank account of the purchaser of the property prior to the processing of the loan application.
A down payment that comes from another source besides the personal assets of the borrower or a gift is rather exceptional, but there are possibilities.
• A gift from the bank : This is actually a no down payment home loan because it is the bank that gives you the 5% (or less) for the down payment. Certainly, the bank has calculated everything, and the rate will be a little higher in order that the “gift” is repaid before the end of the term of the loan.
• Pardoner, SuSu, Box are now being recognized by banks as a source of funds for a down payment. This is usually were you belong to a group of individuals that individuals that pool their resources to allow each to make large purchases in a timely manner. The bank will require documentation and sometimes a list of participants a a means to help source the funds.
What conclusions can we draw from this? You have to treat the down payment as one of the most critical pieces of your mortgage. If you are unclear about how you can come up with a down payment, we would be happy to work with you to lay out the strategy to find the funds for your down payment.