Refinance & Mortgage Tips: Down Payment From Savings

Once you’ve determined the amount you can contribute for your home mortgage down payment, it’s crucial to document the source of these funds. You might wonder, “Why is the source of my money so important?” Lenders need to verify the origin of your down payment to assess the risk of lending to you and to prevent fraud. Therefore, maintaining detailed and accurate records of how your down payment funds were acquired is essential.

Money from your savings, checking, or money market accounts is viewed favorably by lenders due to its traceable and verifiable nature. This type of capital is among the easiest to document. Lenders typically request bank statements that show your funds over a period of time—generally 2 to 3 months if providing full income documentation or up to 24 months if using alternative income documentation. Alternatively, a formal Verification of Deposit may be conducted directly with your bank.

When discussing your down payment, your lender might address “seasoning” requirements. For example, if the money has been in your account for 3 months and is consistently shown in consecutive statements, it is considered "seasoned." Lenders often prefer seasoned funds and may require explanations and documentation for any large, recent deposits, which could potentially disqualify those funds.

There are loan types with less stringent documentation requirements. For instance, No Asset Verification mortgages, as the name suggests, do not require verification of assets, but typically restrict the borrower to 60% to 70% of the property’s value. Another option is the Stated Income Stated Assets mortgage, which allows for limited asset verification and can offer up to 75% or 80% of the property’s value in loan.

For first-time buyers, “no money down” mortgages, where no down payment is required, can be an attractive option. However, these loans often come with higher interest rates and monthly payments and are statistically linked to higher rates of default and foreclosure.

Regardless of your down payment, having additional documented assets beyond the down payment and closing costs—known as "reserves"—can strengthen your mortgage application. Ample reserves, along with good credit and a down payment that has been in your account for a couple of months, can help you qualify for favorable mortgage programs and potentially save you significant amounts over the life of your loan.