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Acceptable Down Payment Sources for a Mortgage Loan in California

In this article: an explanation of acceptable down payment sources in California, including checking, savings, 401(k) and gift money.

When it comes to buying a home, the down payment is one of the biggest hurdles to overcome. For many borrowers, coming up with these required funds can feel overwhelming. But the good news is, there are a variety of down payment sources you could draw from, when buying a home.

In this article, we will explore some of the most common (and acceptable) down payment sources for a mortgage loan in California. We’ll also talk about using gift money and offer some tips for saving.

Acceptable Down Payment Sources for a Mortgage

Different mortgage programs have different requirements, in terms of acceptable down payment sources. So the information presented below might not apply to all situations. With that being said, most of the major mortgage programs (conventional, FHA and VA) allow for the following sources.

Savings Accounts

This is the most common and straightforward source for down payment funds in California. You’ve saved up some money in the bank, and you now want to put it toward a home purchase. And that’s perfectly acceptable. To use savings as a down payment, the funds must come from the borrower’s personal account and cannot be borrowed from someone else. But it can also include funds that have been gifted from a third party (more on this later).

Retirement Funds (401k, IRA, etc.)

Retirement funds are another acceptable source of down payment funds in California. If you have money saved in a 401(k) or IRA account, you could use it to facilitate your home purchase. But you might be subject to early withdrawal penalties, depending on the nature of your account. So be sure to read the fine print and check with your financial advisor or money manager, before using retirement savings for down payment funds. You don’t want any unpleasant surprises.

Gift Funds

Borrowers in California can also use gift money provided by an approved party (like a family member, close friend, or employer). This is an acceptable down payment source for all major loan programs, including both conventional and government-backed. However, mortgage guidelines require lenders to obtain a signed letter from the person donating the money. So be aware of that and plan accordingly. The gift letter should confirm that the funds were given freely and don’t have to be repaid.

Grant Programs and ‘DPAs’

Some government programs and non-profit organizations offer grant programs to help first-time home buyers with their down payments. These programs have specific eligibility requirements, so it’s important to research them before applying. Grants are a type of down payment assistance program (DPA). They are considered an acceptable source of down payment funds for most of the loan programs available in California.

Liquidated Assets

Liquidated assets, such as stocks or bonds converted to cash, can also be used as a source of down payment. For instance, the mortgage buyer Fannie Mae states: “Vested assets in the form of stocks, government bonds, and mutual funds are acceptable sources of funds for the down payment, closing costs, and reserves provided their value can be verified. The lender must verify the borrower’s ownership of the account or asset.” But there might be a limit as to how much of these funds you can use, depending on the type of home loan.

Bottom line: Making a larger upfront investment can improve your chances of being approved for a mortgage loan, while resulting in a smaller monthly payment. So it’s wise to save up as much as you can before attempting to buy a home.

Saving Up for Your Investment

And speaking of saving up for a down payment, here are some tips to help you accomplish that goal:

  • Start by creating a budget. Take a look at your monthly expenses and see where you can cut back. Identify areas where you can reduce your spending and redirect those funds towards your down payment savings.
  • Automate your savings. Set up an automatic transfer from your checking account to your savings account each month. This will ensure that you’re consistently putting money towards your down payment, while reducing the chance you’ll spend it elsewhere.
  • Reduce (or avoid) high-interest debt. The less debt you have, the more money you’ll have available to put towards a down payment. Consider paying off high-interest debt and focus on reducing your monthly payments, if possible.
  • Seek extra income sources. Take on a part-time job, freelance, or consider renting out a room in your home. Any extra income can be directed towards your down payment fund.
  • Be patient and persistent. Buying a home is a big investment, and saving for your investment can take time. But with discipline and patience, you can reach your goal. Set realistic savings targets and monitor your progress along the way.

Remember, the more you save, the more money you’ll be able to put down. This will increase your purchasing power, help you quality for a loan, and possibly reduce your monthly payments. So it’s a worthwhile venture!

Mike Trejo

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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