You’ve finally saved up enough money for a down payment on a decent house in a nice area. You’re proud of yourself (#success) and well, you should be. But here comes the tricky part.
You don’t have a house just yet, but you have this big stash of cash (hopefully) in an account somewhere. A lot can happen to that money between now and the day you get the keys to your dream home if you aren’t careful.
What do I mean, you ask? Well.. Have you ever said you’d do something on a certain day at a certain time and not done it? That’s exactly what I mean. In this case, the consequences could mean you are under a stack of extra paperwork, or worse still, your mortgage request gets denied.
If you’re doing any of the 5 things below, I suggest you stop right this minute!
- Hide it under your bed
Having a piggy bank when you were younger was cute and more importantly, it helped develop a savings habit. Storing cash in a box under your bed as an adult is a different story entirely. Nothing against having a physical reminder to save–particularly if you earn tips in cash and only take them to the bank once it’s a substantial amount.
But having large amounts of money lying around is risky not just because it could get stolen or misplaced, but because you are missing out on money you could be earning through interest. If you put your cash in an account that earns interest, you put your money to work for you – Far better than letting it depreciate in value right?
Another reason to deposit your cash in an account regularly is that some lenders see large deposits before escrow and assume it is a loan you got elsewhere unless you prove to them that it isn’t. It’s never a good idea to raise red flags prior to closing. You want a smooth transaction right? This leads to our next point…
- Large last minute deposits
This is a big no no. Even if you know you will be getting a large portion of the down payment from your parents on your wedding day for example, make sure you don’t deposit it all at once a week before your meeting with the lender. As mentioned above, lenders will assume that a large sum of money coming in at once means that you’ve just received a loan. Letting the money ‘season’ in the account for some time (we’d recommend 60 days) will make sure no red flags are raised.
In our experience, most lenders will look at 2, or 3 months of bank statements to understand your financial situation before they can approve a mortgage. So if you want to dump a huge pile of cash into your account, just make sure it’s before those all-important 60 days.
- Invest in high-risk products
Having all that money in your account might make you think you should do something smart with it so it isn’t just sitting there. If you can multiply it, then you’ll have even more money for a down payment, right? Well not really.
We aren’t saying you shouldn’t invest your money, we’re just saying you shouldn’t invest this money. You want to stay as far away as possible from stocks and other high-risk investments. If something happens and the stock price crashes, you’ll end up in a worse position than when you started out. You’ll then have to start saving all over again. If you must do something, we would suggest a money market account, or a Certificate of Deposit (CD).
Although an interest-earning money market account won’t make you rich, it’s the best place to store your money until you need it.
- Keep your funds in another person’s account
Now this might seem obvious, but it happens quite often. If your family or partner for example is contributing to the down payment, you might keep all the money in their account until you need it. This can be a real obstacle to getting your loan. The lender wants to see that you, the buyer, can afford the down payment.
As we mentioned before, they usually look at 2 months of your statements before deciding to approve a loan. If these funds are kept in someone else’s account, that could raise a flurry of red flags and give the lender a reason to reject your request.
In cases where you and your partner have a joint account and you both have decent credit scores, you’re good to go. If however, one person’s credit rating is less than stellar, it would be in your best interest to move the funds to a separate account.
- Last minute consolidation
Buying a house is a big decision which often takes a few weeks to finalize. The last thing you want to do is gather the money from your different accounts and make one big transfer 2 weeks before you go to the mortgage office. This is a paperwork nightmare for your lender and trust us, you want to keep your lenders happy.
Instead, prepare ahead of time and put your money together 1 – 2 months before you apply. We’re not saying this alone will get your loan rejected, but as discussed earlier, ‘seasoned’ funds will help shorten the time it takes for you to get a decision.
All in all, make sure you keep an eye on that money in the months before your loan application to avoid getting rejected after you’ve put in so much effort into saving up.
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