So you finally saved up a good chunk of change for your down payment, and now you think you’re in the clear. Savings goals (and #lifegoals) = reached.
But hold it right there. You haven’t actually bought a home yet, and a lot of terrible things could happen to your hard-earned money between now and then.
How? Poor money management, of course! Do the wrong thing, and you might end up in a paperwork nightmare. Or worse, denied a loan altogether.
So what’s the wrong thing? Glad you asked.
1. Stuff it under your mattress
It might sound like we’re just trying to be clever, and we are (always), but there is a very real concern here—especially if you earn tips and bring home cash money every night. As a former waitress, I can honestly say it happens. You get home, and you stuff whatever you want to save in a jar, or the dresser, or under the mattress—and then you forget about it.
But leaving those funds lying around isn’t just risky in the event of your forgetting or, worse, experiencing a break-in. You’re also losing out on money. The sooner you put your cash reserves in an interest-bearing account, the sooner your down payment can start making you money. Neat, huh?
There’s also another very good reason to deposit early and often.
“If you have large deposits into your accounts before escrow, the bank will assume it’s a loan from someone unless you can document that it is not,” says Casey Fleming, mortgage adviser and author of “The Loan Guide: How to Get the Best Possible Mortgage.” “Since you can’t document that a cash deposit is not a loan, it could force the lender to decline your loan.”
2. Make large deposits at the last minute
If you’re planning on getting part of your down payment in the form of a gift from Mom and Dad, don’t wait until you’re headed to the loan office to ask for a check. As we mentioned above, lenders will assume a large recent deposit is a loan that you need to pay back. But if you “season” the funds by letting them sit for a while, the extra money won’t set off alarm bells.
Generally, lenders collect two months of bank statements before approving you for a mortgage, Fleming says. So if you make any big deposits before the 60 days during which they research, you win!
3. Make high-risk investments
Still a few months out from buying a home? You might get the burning temptation to do something with those down payment funds. After all, if you can use that money to make more money, that means more equity upfront. Um, right?
We’re not going to tell you it’s a bad idea. Actually, scratch that, we will: It’s a bad idea! No matter what, steer clear of riskier investments such as stocks. If the stock tanks, you’ll end up losing and waiting even longer to build things up again. A better option? A CD or money market account.
“A high-interest money market doesn’t pay much, but it’s probably the best place to park money you’ll need soon,” Fleming says.
4. Store your down payment in someone else’s account
If you’re stashing your cash in someone else’s bank account—say, Mom and Dad’s or your significant other’s—that could create big problems when you go to buy; it could cause the lender to run for the hills.
“The lender wants to make sure the buyer is the one coming up with the down payment funds,” Fleming says. (See Nos. 1 and 2!)
If your down payment savings are in a joint account and you’re both going in on the mortgage, then you’re safe. But if, say, you have stellar credit and your partner’s is in the toilet, play it safe: Make the switch to an account in your name only at least two months before you apply.
5. Wait until the last minute to consolidate funds
Let’s say all your cash is in different accounts or perhaps not liquidated yet. But you’ve got the money, so it’ll be NBD, right? Not so fast.
“Don’t leave it until the last minute, or you’ll create a paper trail nightmare for the lender,” Fleming says.
Instead, consolidate everything you need for a down payment, closing costs, and some extra reserves into one account a month or two before you apply. It’ll help things move along more smoothly.
Bottom line: Keep a good eye on those funds in the few months leading up to applying for a loan. If you don’t, it might not cause you to get denied, but at best, you’re looking at a serious financial headache for you and your lender.