Down Payments

There was a time not so very long ago when 100% financing was available and no down payment was required to buy a home. Alas, those days are gone except in a very few instances. Today, most buyers need to come in with a minimum of 3-5% down. What follows is a lengthy list of what are and aren't acceptable sources of down payment.

Obviously the earnest money deposit made on the sales contract can be credited toward the borrower's down payment, provided that it can be verified that the funds have cleared the borrower*s account. A current bank statement reflecting the debit into the account is acceptable. If the deposit is 2% or more of the sales price, a copy of the canceled check, front and back, is required prior to submission.

The borrowers can provide 3 months' current, original bank statements to verify funds in the bank. If you do not have original bank statements, a Verification of Deposit (VOD) will be required.

Tax law allows gifts of several thousand dollars a year to be bestowed without tax consequences to either the giver or recipient. The gift exclusion amount is adjusted annually to reflect inflation. For 2007 it was $12,000 and remains the same for 2008.

Not close to your family? Not a problem. The gift exclusion isn't limited to relatives.

The monetary present can be from anyone, including a church, municipality, or non-profit organization. Note: (Several of the non-profit down payment assistance programs for homeowners that were backed by organizations like Nehemiah, Ameridream, et al. have been eliminated by the Housing and Economic Recovery Act of 2008. New legislation is being proposed to reinstate these programs for homebuyers. It remains to be seen as to whether these efforts will be successful).

Nevertheless, the California Housing Finance Agency (CALHFA) still offers a 3% down payment assistance (DAP) program known as the CHDAP for conforming loans (up to $417,000) .

Cash Gifts or Grants (from Institutions)
With gifts, whether they be from relatives or grants from other sources, certain restrictions apply. If the applicant is using gift funds, the applicant is still required to have sufficient personal funds to cover a minimum portion of the down payment.

Depending on the Loan-To-Value (LTV) there are differing down payment limitations:

A. 97% LTV.If the applicant will be providing a total down payment of only 3% of price, that entire 3% must come from the applicant's personal funds. Gift funds may be used for closing costs and reserves, but NOT for this minimum down payment.

B. 95% LTV.When the total down payment is 5%, the first 3% must come from the applicant's personal funds. The remaining 2%*as well as other closing costs and reserves*may be covered by gift funds.

C. 90% LTV. If the applicant will be providing at least 10% of down payment, the first 5% must come from the borrower's personal funds. The remaining 5% and more*as well as other closing costs and reserves*may be covered by gift funds.

D. 80% LTV. The full down payment can be gifted. Even with gifted funds, there are stipulations regarding what is required to be deemed acceptable:

* Gift letter. The gift letter must come from a qualified donor (relative) and must clearly state (1) the relationship between the borrower and donor and (2) that no repayment is expected.

* Or implied. Gifts or equity credits from the builder or seller are not acceptable gift funds.

* Donor source documentation. The donor must demonstrate that they have the funds to give as a gift. Copies of the donor's bank or asset statements for the accounts from which the gift funds will be drawn must be provided.

* Copy of gift check. The applicant must make a copy of the gift check provided by the donor.

* Verification of deposit. The applicant must verify that he or she has deposited the gift funds. A deposit slip indicating the date, account and amount should be sufficient.

If the borrowers are selling their current residence the equity in the current property may be sufficient for all or a portion of the down payment. A copy of the final HUD-1 Settlement Statement, however, must be provided prior to closing on the new house.

Bridge (or swing) loans, using the borrower's current residence as collateral, are acceptable, and there is no limitation on the term of the bridge loan. One stipulation is that the borrower must have the ability to carry the payment on the new home, the payment on other obligations, the payment on the current home, and the payment on the bridge loan.

Funds from individual retirement accounts (IRA/Keogh) and tax favored retirement savings accounts such as 401k accounts may be borrowed from for down payment purposes. For a 401k account to be utilized the borrower needs to be vested and the lender must be able to verify the account and the amount of the borrower's vesting.
If you*re looking to buy your first home, let the Internal Revenue Service help. Tax laws allow you to use up to $10,000 in funds for the down payment if you've never owned a house. If you're married and you both are first-time buyers, you each can't pull from your retirement accounts, meaning a potential $20,000 down payment.

Even better is the IRS definition of first-time homebuyer. Technically you don't have to be purchasing your very first abode. You qualify under the tax rules as long as you (or your spouse did not own a principal residence at any time during the two years prior to the purchase of the new home.

Government bonds are valued at their purchase price, unless the redemption value can be determined and verified. An actual receipt of funds will be required. Around $9 million worth of saving bonds are sitting around, ignored by their owners and not earning a penny of interest.

The value of the stocks, as was the case with bonds, will need to be verified via an actual receipt.

Trust account funds can be used if the borrower has access to them and it is verifiable.

Cash-on-hand (a.k.a. "mattress money") is disallowed as a source of funds for a down payment because the source of the funds may be from illicit activities or criminal enterprises.

The property seller may take a borrower's existing property in trade as part of the down payment, as long as the borrower has made a 5% cash down payment and his or her equity contribution is a true-value consideration. This is determined by subtracting the outstanding loan balance of the property that is being traded, plus any transfer costs, from the lesser of its appraised value or trade-in value (as agreed by both parties). A separate written appraisal for the property must be obtained, plus a search of land records to verify ownership and determine whether there are any existing liens.

Any item of value can be used for trade, including automobiles, motorcycles, jewelry, coin collections, stamp collections, etc. A separate written appraisal is required to establish the value, but full credit will be given toward the borrower*s down payment.

The portion of a rental payment that exceeds the market rent can be applied to the down payment if there is a valid rental/purchase agreement in effect.

With Fannie Mae sweat equity is not acceptable. But with Freddie Mac it is, if the borrower provides a 5% cash investment from their own funds.

Borrowed funds that are secured by an asset represent a return of equity. Because of this, they may be used. Assets that could be used as collateral include certificates of deposit, stocks, bonds, automobiles, real estate, and life insurance policies. It is necessary to verify the term of the loan and prove that the debt is secured.

Borrowed funds that are deemed unacceptable are signature loans, lines of credit on credit cards, and overdraft protection on checking accounts.

Proceeds received from the sale of personal assets are acceptable with evidence from the borrower that he/she owned the asset, documentation to support the value of the asset, evidence of transfer of ownership (a copy of a bill of sale is acceptable, or a statement from the purchaser) and evidence of deposit into the borrower's account is required (deposit slip or bank statement).

By putting your discards up for bid on eBay and similar sites, it may well prove the dictum that "one man's trash is another's treasure".

Copyright 2021 Rod Haase.  All rights reserved.