New Home Loan: Is Cash on Hand Acceptable for the Down Payment?

Posted by  on Sep 07, 2010

Dear Liz,

I have a large amount of cash that I plan to use as a down payment on a home purchase. With current mortgage rates as low as they are, I'd rather not have to put it in a bank account and let it sit for months before I buy. Can I use cash for my mortgage down payment?

Gary, California

Dear Gary,

13 percent of all U.S. households do not have savings or checking accounts, according to one study by the Federal Reserve, so these folks have a harder time accounting for their mortgage down payment than others do. Cash as a down payment is not considered an acceptable source of funds by Fannie Mae. Freddie Mac allows it in certain cases, such as for mortgage loan applicants who have no savings or checking accounts. FHA does allow it if you can document it properly. As a loan officer, I did get mortgages approved for several borrowers with cash down payments.

Sourcing a Cash Down Payment

In order to show the underwriter that the cash saved at home did not come from an unacceptable source, such as a gift from the seller, I had to create a spreadsheet showing the borrower's income, expenses, and what was left over for savings. This was to prove that the borrower could reasonably have saved such a sum.

You need to deposit the money in an account with a savings institution or investment firm, or lodge it with the escrow agent. You also need to provide an explanation of how you saved the money and over what time period. The story and numbers must be reasonable. FHA underwriting guidelines note that those with checking or savings accounts are much less likely to save money at home, so if you have these accounts, your story about the cash has to be extra compelling.

Cash from the Sale of Assets

If the source of some or all of your cash is proceeds from the sale of an asset like a car, boat, or other item, you need to explain it and document it as best you can. Proving that you had ownership of the sold property comes first--if it's a car, you would have registered it with your state DMV. You also have to document the item's worth, for example, prove your car's value with the Kelly Blue Book, or get an appraisal for your jewelry with a GIA-approved appraiser. Provide a copy of the bill of sale. If your sales price exceeds the appraised value of the item, you only get credit for the lower figure.

Hard Money Lenders

Hard money lenders won't care about the source of your cash down payment, but prepare to pay dearly for your privacy--several points upfront and a high interest rate too. For the best mortgage rates in California or any state, you need to let your money sit in a bank for a couple of months (most lenders request two months of bank statements to verify your assets) before applying. If you're concerned about getting the lowest current mortgage rates, you can always lock in your rate for 60 days or longer by paying a fee upfront.

To start the process, compare mortgage quotes on this site, and when you speak to an agent, ask of they underwrite to Fannie Mae's guidelines, Freddie Mac's, or if you can qualify for an FHA mortgage.


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