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When using down payment assistance you still need money and here’s why

Posted on January 29, 2016 by Ray Williams (NMLS #216267).

When you are deciding to purchase a home there are many important things to consider.  You will read and hear about the importance of your credit score (FICO), funds for down payment, rates, etc.  All of those are important and all of these areas should be considered and evaluated before choosing to get pre-approved but what I want to discuss is the importance of money in the bank.

You may be asking “what does that mean, money in the bank?”.  It means that even if you know you will be looking into down payment assistance or maybe you are fortunate enough to have a family member gifting you funds for your purchase, you will still need money in the bank to purchase a home.  If you are asking yourself why would it be needed if you are getting assistance, let me explain.

When you purchase a home, you are required to be able to provide a deposit when your contract is accepted (earnest money).  Earnest money are funds that you need to have readily available in your bank account.  These funds can’t come from any down payment assistance grant program.  You can however get them in the form of a gift from a family member BUT be sure to explain to your lender well ahead of time during your pre-approval where the funds will be coming from and what is expected from the gifter!  Regardless if the earnest money was from a gift, you are still going to be needing money in the bank because even though your earnest money does go towards your closing costs, it may not cover all of the closing costs.  How much is earnest money?  In this market you should look to expect anywhere from $2,000-5,000 minimum.

These funds need to be in your bank account PRIOR to getting pre-approved.  Technically you can’t be pre-approved to purchase without them showing in your assets.  Now, in all technicality let’s say you do get pre-approved prior to you showing these funds because you explained to your lender that these funds are coming in the form of a gift but they have not yet been deposited,the gifter was waiting until you find a house, or maybe you are waiting on your tax return refund.  This is understandable and not uncommon so a lender may say ok, everything else is in line and you are pre-approved to go look for a house.  Here is where you could be putting yourself in danger… now you found a house you want to make an offer, you put in your contract, it gets accepted, now you have to put forth your earnest money and you don’t have the funds in your bank.  What do you do now?  Your money needs to be in place regardless of how you are obtaining.  If you don’t have a gifter for the funds and you don’t have the money in your bank for earnest money, what do you do?  You shouldn’t have been pre-approved in the first place.  Your are now putting your loan approval in jeopardy.  You need to protect yourself and be ready before you start looking at houses!

Bottom line, regardless of what you have heard or maybe even read,  if you are looking to purchase a home you need to have money in the bank.  There is really no such thing as purchasing a home with zero down.  Prepare yourself with having a MINIMUM of $3000-5000 in the bank before filling out a loan application, before running your credit and before sending in your financials to a lender.

To learn more and/or if you have any further questions, please contact us.

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