By Doug Goelz, Mortgage Services 

One of the first considerations when planning to buy a house is the source of funds for the down payment.  The down payment often is the biggest hurdle buyers face, regardless of the monthly payment they can afford or the price of the house, and buyers often line up funds from a variety of sources.  However, lenders will not allow some funds to be used because of the money’s dubious origins, grey areas between state and federal laws, and basic credit principles.   If you are planning on using any of the following to buy a property, be sure to discuss with your potential lender, sooner rather than later, whether they will be allowable.

Crypto Currency – You cannot deposit crypto with escrow for your down payment.  If the seller agrees, and you are paying all cash, MAYBE you can use crypto to buy the property outright.  A lender MAY allow you to redeem crypto, and then use the funds as your down payment; if so, the “paper trail” from crypto to dollars has to be well-documented.  Lender’s rules on crypto are still very conservative, but evolving.

Money from Cannabis – Cannabis operations are legal in California, but not at the federal level, and most lenders have federal regulators.  So, most lenders won’t allow any money derived from cannabis to be used as income or a down payment when getting a mortgage.  How do they know the money came from cannabis?  If your income is from cannabis, then pay stubs, W2s, and/or business tax returns all could indicate a cannabis operation.  If a large deposit shows on your two most recent bank statements, the lender always will ask where the money came from.

Cash – Yes, it is very difficult to use legal tender in a purchase transaction.  Lenders are very concerned about illegal activities as potential sources of cash, and any money laundering activities.   If you have tens or hundreds of thousands in cash (piles of bills) you were planning on using to buy a property, you may have to rethink your financing and purchase strategy.

Borrowed Money – Lenders will not allow you to borrow the money for your down payment and closing costs.    For example, if you don’t have the cash for the last $10,000 for closing costs, a lender will not allow you to do a cash advance on your credit card (in the past, I have seen this done).  However, 401(k) loans, home equity lines of credit secured by another property, and margin loans against your investments at a brokerage ARE allowable; they are not considered “borrowed funds” because they are secured by your assets and/or equity.

Gifts from Friends – Lenders will not allow friends to give you money for the down payment.  Lenders assume any money from a non-relative has to be paid back eventually.  Gifts from relatives are allowed, and relatives can include step-relatives, in-laws, fiance(e)s, and 2nd cousins.  There just needs to be a family connection with the person giving you the money.

Think your down payment might be questioned by a lender?  Be sure to discuss the sources of your funds as soon as you can with a lender.  Feel free to contact me at 415‐730‐4665 or with any questions and to discuss your financing options.