The down payment is one of the non-negotiable requirements when applying for a mortgage to buy one of the homes for sale in the Guelph area or anywhere else in North America for that matter. It used to be optional, but zero-down loans have become practically extinct because they contributed to last decade’s housing bubble.
It is imperative to pay an adequate down payment, but producing it is just half the battle. Many lenders can reject your down payment for various reasons and deny your mortgage application altogether. Below are the likely explanations why a lender might say no to your down payment.
You Fail Season Your Money for 60 Days
As a general rule, any money coming from a legal source can be used as a down payment. Other than your actual savings, you can also use additional funds, such as the proceeds from the sale of a car or a monetary gift from a loved one.
However, some sources of funds are inherently questionable. Mattress money is a classic example, for a lender has no way to determine whether it is legally obtained.
To beef up your down payment and make it acceptable to a lender, you should “season” it. In other words, you should deposit it months before you apply and leave it alone until your mortgage is approved.
Usually, a lender will ask your two most recent bank statements, which cover 60 days of your account history (give or take), to study your financial activity. Any large deposit will raise some eyebrows and merit stricter scrutiny. You will be asked to provide a letter of explanation to describe where the large sum of money came from.
To avoid any hassle, put all the money you want to use for down payment two months before you apply for a mortgage.
You Document Your Mortgage Down Payment Gift Improperly
A gift can be easily mistaken for an ineligible type of asset. A lender will typically accept it only when properly document it.
You should provide evidence showing where the cash came from and when you received it. It could be a canceled check or any paperwork proving it was electronically transferred.
The idea is you should have a valid paper or digital trail any lender can confidently follow. Otherwise, the monetary gift you received might not be allowed to supplement your cash reserves.
You Take Out Another Debt
Lenders frown upon the use of another debt to increase a mortgage down payment. First, it raises your debt-to-income ratio. Second, it is indicative of a lack of actual savings on your part.
If you need to obtain another debt to afford to buy a house, then you can’t afford to purchase it in the first place. Lying about it will not work too, for technologically savvy lenders use alternative data to catch fraud. Do not even think about doing it or else your mortgage application will likely be denied, or you can be charged with a criminal offense.
Paying a small down payment will almost definitely make your mortgage more expensive, but cheating to make it more impressively has more devastating and lasting consequences. Know the rules, and play by them to avoid getting on the wrong side of any lender.