Over the course of the last few years buying a home with zero money down had become increasingly simple and has grown in popularity. However, with the recent mortgage market meltdown, buying a home with no money down is beginning to, and will continue to, become much more difficult. The need for a down payment is going to become much more common once again as lending guidelines are tightening up on high loan to value loans.
So what sources are acceptable to most lenders for down payment funds and what are the guidelines for this down payment money? Usually most lenders want to see adequate funds available for a period of at least 60 days in your account. The most common methods of proof of these funds are through either a Verification of Deposit form or through 2 months of the most recent account statements. Thus, if you have "mattress money," which is money that you do not keep in your bank account or in any other type of account and you just have it sitting around your house you will want to deposit that into a bank account or investment account at least 2 months, but preferably longer, before you are ready to begin searching for a home. The requirement of having this money in your account for at least 60 days before being approved for your home loan is what is known as "seasoning" of your funds. By having the money in your account for a couple of months it shows that you have the ability to put money away, that the money is more likely to be yours and not a personal loan from a friend or family member, and that you have adequate money to use for the down payment of a home. If you are using money that was the result of a large deposit within the past 60 days for your down payment and/or closing costs of your mortgage, then you will need to "source" this large deposit. Sourcing the deposit simply means that the bank or underwriter wants you to show proof of where the money came from and that it came from an acceptable source.
Now that we have touched on sourcing and seasoning of down payment funds, what sources are acceptable to use for your down payment? Generally any funds that come from a checking account, savings account, 401k account, IRA account, money market account, stocks, bonds, mutual funds, certificates of deposit, and just about any other liquid asset account are acceptable, granted they have the 2 months seasoning requirement and there have not been any large deposits made within the last 60 days to cover all or part of your down payment. If you are taking a loan out on a retirement account, then full disclosure of the terms and payment of the loan must be included in your loan package and calculated into your debt to income ratio. Most lenders will only account for 70% of a retirement account since the money is generally deposited pre-tax and usually a early withdrawal penalty is associated with early withdrawal. The sale of personal assets is an acceptable source for down payment funds as long as proof of ownership of the asset can be established, transfer of ownership is proven, receipt for the sale is provided and value of the item can all be proven and provided.
Some other less common sources of a home down payment are borrowed funds secured by an asset, rent credit for option to purchase, credit for the value of the lot (if lot is owned already in regards to a construction loan), bridge or swing loan, cash value of life insurance policy, community pooled savings funds, and individual development accounts from non-profit agencies providing down payment matching programs. Generally non-acceptable sources of down payment funds include credit cards and credit card cash advances, personal loans, signature loans, overdraft protection on checking accounts, and cash on hand, also known as "mattress money." There are exceptions to some of the above down payment sources listed above, however these are all of the most generally accepted guidelines.
The type of financing will change some of these guidelines for what is acceptable and what is not in terms of a down payment. For example subprime lenders will allow different things than conforming and FHA lenders. This article has been based more heavily on Fannie Mae and Freddie Mac lending guidelines more than FHA and/or subprime lending guidelines. Therefore, consult with your mortgage lender about what type of financing you will be obtaining and ask specific questions about what is and is not acceptable. The information listed above will give you a very good idea though as to what is traditionally permitted and what is not.
The author of this article, Dave Zwierecki, is the President of First Security Financial Service and has over 10 years of experience in the credit, mortgage lending, and home improvement fields. He is the owner of http://www.GoFirstSecurity.com and http://www.TheMortgageU.com, which are sites devoted to the education of consumers regarding real estate, mortgage, credit, and home improvement related material.