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What is a down payment? Does it matter if it comes from drug sales?? LOL Wisconsin Rules!

Mortgage and Lending with Funky Quail Vintage

Seriously folks, I thought of all the blogs I have read lately, this one, was  really important!  It is a largely misunderstood part of the process and hope it helps customers, buyer, sellers, Fsbo's, and realtors alike!  Thanks for taking the time!

Mr & Mrs. customer,  you truly NEED TO KNOW what a down payment actually is, and how we as lenders perceive them!  This is going to be a rough rough rough outline, so please email me for specifics to Darin@osmwi.com.  Keep in mind, that down payments required, are different from loan program to loan program.  For example, Conventional programs have different requirements from that of FHA loans.  Also, warrantable vs non-warrantable condos have different required down payment percentages as well!  Please note that when reading the following, there are hundreds of exceptions to the rule!  Most important job of everyone involved is to be upfront, honest, and forthcoming on any issues.  There are exceptions that can be had to almost any rule, but in order to GET that exception, a strong case has to be built and argued!

First, we will start with CONVENTIONAL LOANS!    With most conventional loans, people have to have 5% down on the purchase of a home.  No matter HOW MUCH your funder, or lender is requiring, this is a very important number!  This is why!!

The 5% down has to be YOUR OWN MONEY!!  Examples of your own money include, selling a vehicle, boat, realestate, stock, etc...  Money that you have had in your checking or savings account for 60 days or more, is your own money.  Closing out a CD (no not the music kind) is your own money.  Money that you will see from the sale of another property, is your own money.  Money that you inherit, or are left in a will, CAN be your own money.  If you have what YOU consider to be your own money DONT ASSUME!!! Ask your lender if it is!!  They will be impressed at how smart you are!!  :)

Now, lets talk about what is NOT YOUR OWN MONEY!  A gift from your parents, is NOT your own money.  Cash in a coffee can buried in the back yard, could be    your own money, but more than likely is not.  This is also commonly referred to as "mattess money."  More on that later...  Money you get in your purchase agreement, commonly referred to as a "seller contribution", is not your own money. NOTE:  You can have the seller contribute towards closing costs, just not towards down payment in this example.   A loan, private mortgage, or gift of equity is NOT YOUR OWN MONEY!  NOTE:  You can use a gift of equity though from a blood relative or estate, IF the amount of the down payment is 20%.  For example, if you are buying your deceased mothers home, the estate can gift you 20% equity, and your loan amount then would be for 80% of the purchase price!  Using numbers, a 100k purchase, 20% down payment in a gift of equity = an 80k loan! 

Now let's talk briefly about FHA loans!  Though I have done then for 18 years, I would like to offer you an alternative source for not just opinion, but fact!  www.fhaloansfhamortgages.com  Again though, I would like to offer you my email for any further questions.  Darin@osmwi.com

FHA loans, in general accept most types of down payments!  They accept some grants, most down payment assistance programs, MOST items listed in a offer to purchase, as well as "un-seasoned" money aka, money that has not been in your checking and/or savings account for 60 days or more!  Mattress money can also potentially be used, if you can properly disclose the source, and what is called a "paper trail".  A paper trail is required on most down payments, and consists of basically just tracking the money and it's source.  Gifts of money, equity, etc..are very acceptable, but again, have documentation requirements, as well as paper trails that need to be followed!  Loans etc..are also acceptable, but you will be required to provide copies of your paperwork prior to closing!  ONE GOOD PART of FHA loans, is that they accept almost everything.  These are strong loans for any type of borrower, with any type of situations!  But like everything else, TALK TO THE LENDER!  Don't be afraid to tell him or her the details of your situation! Lastly, let's talk about My Community, Rural Development, and they low or no down payment programs!  NOTE:  VA LOANS ARE 100% Financing, so you dont need a down payment, however, check with your lender on what closing costs can be covered by gift, or seller contributions! 

Lastly, let's talk about LOW DOWN PAYMENT LOANS, like My Community, HomePossible, Guaranteed Rural Development loans, and others.

These programs are much more liberal than other programs, as well as forgiving.  However, they are more strict on how much you can borrower based on your income, and can be specific in terms of WHERE you buy a home!  They range from 5% down to 0% down, and your lender may suggest one of these programs once they have gone over your application and situation!  These programs are/were put into place to help people become home owners and stop renting!  These programs can also be specific, like most, on the language that is used within the offer to purchase!  If you read my other blogs, you will note several occassions where I state that experience does count, and this is an area where it is important!  Working with a lender and realtor that are experienced with all types of situations, is very important today!  I will be doing another BLOG tomorrow on the offer to purchase from a lender perspective, that will also help, whether using a realtor, or buying straight from a seller througha FSBO, or For Sale by Owner contract! 

I am sure that I have left several things out, so please email me with any direct questions!  The most important things to take away from this blog are to ask questions, be clear on your situation, and work with experienced and knowledgable people!  Part of the Realtors job, as well as the Lenders, is to not just put you into a house!  It is also to put you into the RIGHT HOUSE within your means and ability!

Lastly, I was kidding about the drug sales comment in the title and was merely trying to get  your attention! BUT, believe it or not, that IS one of the reasons that we have "paper trails" in our business!  It is not just to track the flow of the money, but more importantly, where it came from!  These can be VERY important issues in the loan process and can either help you buy a home, or keep you from buying one!

Your house buying process is meant to be enjoyable!  The more knowledge you have going in, the smoother the transaction and the more likley you will be to get the best program with the best rate for your specific situation!

Happy buying! 


Vickie Nagy
Coldwell Banker Residential Real Estate - Palm Springs, CA
Vickie Jean the Palm Springs Condo Queen

I recently had a deal that involved mattress money and it created havoc with the lenders. It did close, though.

Dec 15, 2008 08:10 AM
Patty Carroll
Vancouver, WA

Great points here sometimes we just assume that they know what it all means. Great post.

Dec 15, 2008 08:22 AM
Darin Osenberg
Funky Quail Vintage - Nashville, TN

Hi Vickie!

Thanks for reading!  Yeah, mattress money is probably a BLOG in and of itself~!  It is so specific to the program, borrower, credit, etc....If they don't have a checking account, and they take the mattress money and OPEN the account, then you have to do a letter of exlanation, and unless it is FHA or something like that, you will have to wait 30-60 days for it to be seasoned!

Sometimes, lenders do things behind the scenes to help with the closing, and to make it smoother for everyone, but FAIL at making it a teaching moment for future transactions! 

I am very glad your deal closed!  Would love to know specifics for the future!  Thanks again!


Dec 15, 2008 08:24 AM
Donna Harris
Donna Homes, powered by JPAR - TexasRealEstateMediationServices.com - Austin, TX
Realtor,Mediator,Ombudsman,Property Tax Arbitrator

Great, basic information.  I've heard Vegas is suffering because of all the dealers and waitstaff who can't prove their income as it's not seasoned.  Live and learn, use a bank!

Dec 15, 2008 08:37 AM
Jonathan Zissel
Dale Sorensen Real Estate - Vero Beach, FL

Classic post, strong info and basics that are commenly misunderstood!! I had a deal that invovled gift money and that became a sticky situation because it wasn't from a family member!!! Enjoyed the reading and yes the title did pull me in :) !

Dec 15, 2008 08:38 AM
Gabe Sanders
Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

Thanks for the post.  Great tutorial for the uninitiated.  I'll use this for some of my clients if you don't mind.

Dec 15, 2008 09:00 AM
Darin Osenberg
Funky Quail Vintage - Nashville, TN

Thanks Donna & Jonathan!

Appreciate the comments!  It means alot to me!

Thanks so much!


Dec 15, 2008 09:00 AM
Danielle Vinson
Sibcy Cline Realtors - Batavia, OH

This is GREAT info! Thanks so much. ;)


Dec 15, 2008 09:01 AM