Failing to save enough for a down payment is one of the most common reasons why a borrower does not qualify for a California, Oregon, Iowa, or Utah mortgage. Since zero-down loans have become extremely rare on the market, you can no longer finance 100% of your property purchase.
However, the real problem of some borrowers is not having any cash to bring in at closing. They who struggle the most to come up with a big-enough down payment lacks strategy.
To be clear, you can’t use any money to put down when buying a house. Not all frown-upon assets are strictly prohibited. If you structure your cash reserves appropriately, you can beat the system. Below are the things you can do to pull it off.
Move Mattress Money to the Bank
Mortgage lenders generally consider cash on hand unacceptable, for there is no telling how it was obtained and how long you have had it. Even if you earned your “mattress money” fair and square, a lender would not just take your word for it.
A good trick for converting your cash on hand is to deposit it to your bank account over 60 days before you apply for a mortgage. Two months is the typical “seasoning period” to integrate such a liquid asset into your verifiable savings. If you also want to sell some of your valuables and use the proceeds from the sale to increase your down payment, season the money.
A lender usually asks just your previous two bank statements. If you have made significant deposits at least 60 days ahead of the mortgage application, you may escape scrutiny and another hoop to jump through.
Turn Other People’s Contributions Into Donations
You can take handouts but only when they are classified as donations. There must be paperwork to attest where the additional funds came from and when they were given to you.
To turn monetary contributors into legitimate donors, back their good deed with a gift letter. This document tells a lender everything necessary there is to know about a mortgage down payment donation. It should include the donor’s name, contact information, and relationship to the borrower as well as the date of money transfer.
Also, a donor must provide a statement to clarify that the gift is not a loan, which does not need to be repaid. Otherwise, the funds will be added to your liabilities and increase your debt-to-income ratio.
Piggyback Another Loan on Your Mortgage
Who said a second debt couldn’t be used to make a mortgage down payment more affordable? A piggyback loan can provide instant cash to supplement your down payment and possibly help you avoid private mortgage insurance.
Before you take out a piggyback loan along with your primary mortgage, understand that both debts must be paid at the same time and separately. So, your monthly housing repayments will be much higher and stay that way until the second loan matures.
But then again, this option makes sense only if you wish to apply for a jumbo loan to buy a large house. If you do not qualify for a piggyback mortgage, consider using a credit card cash advance instead to increase your down payment as long as you season the funds first.
Lenders impose different requirements and restrictions for assets and cash reserves. Find out the conditions your prospective lender has to think about your strategy accordingly.