Down Payment Sources

Where does the money come from?

With recent stricter credit regulations many lenders will require putting up to 10% down when financing your home. Where will these funds come from? Which option is right for me? Let's explore some options...

BANK ACCOUNTS - Your bank accounts will probably be the first thing you look at for the down payment. Presently, savings account earning interest is low compared to loan rates. Plus it is easy to withdraw. Lenders view bank accounts as one of the best assets to have.

GIFT LETTER - If the money is coming from a family member or another individual then a "gift letter" is needed for documentation. A gift letter is proof of money given as a gift with no repayment. Therefore, it is not added to your debt ratio.

CASH DEPOSITS - Sudden deposits of large sums of cash will require documentation of its source. The lender needs to know that it wasn't borrowed and now is a debt that will change your debt ratio.

RETIREMENT ACCOUNTS - Most retirement accounts will let you borrow against them. The downside is now you have added another debt which may lower the amount of mortgage available to you. The taxes you will have to pay on this type of withdrawal may outweigh any benefit. If you are thinking about a regular withdrawal of your accumulated retirement funds, again you will be faced with considerable taxes for federal income tax withholding. It can also put you a different tax bracket since you will now have to add it as income for the year.

INVESTMENT ACCOUNTS - Generally investment accounts can easily be liquidated. Consider what the performance of your portfolio is and what the cost of liquidating it will be. It may not be profitable to cash in your investments at this time.

CERTIFICATE OF DEPOSIT - Withdrawing a certificate of deposit before maturity is not a good idea if it soon (2-3 months) going to mature. The penalty you will have to pay is not worth it. Consider redeeming only a recently opened certificate of deposit. The amount of interest you will forfeit will be minimal.

SAVINGS BOND - Early redemption of savings bonds will affect the amount of interest you earned up to redemption. Penalty for early redemption is lose of some accumulated interest.

401K - It is not wise to withdraw from a 401K because of a tax penalty that will be assessed and again you will have to claim it as part of your yearly income. Your employer may have rules regarding withdrawals and continued contributions.

After considering all of the above options, hopefully you can decide what is best for your situation. Knowing where your finances are and can be will eliminate the stress and frustration when it comes time to place an offer.

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