How Moving Down Payment Money Around Can Affect Your Mortgage Application

Moving down payment money around while in the process of applying for a mortgage loan can slow your application approval process, affect the ratios on which your loan was going to be approved and raise suspicions with the mortgage lender as to the accuracy of your application. The following explains the role of your down payment, how moving down payment money around can have a negative impact and what you can do to avoid it.

Purpose of a Down Payment 

Your mortgage loan down payment is protection for your lender. It reduces their risk because there is already equity in your home at closing. While the home serves as collateral for a loan, there are costs associated with foreclosing on it and selling it if you default. The down payment gives room for these costs and for market changes.

If you put 20 percent down on your home, your lender will not require that you get private mortgage insurance. Below a 20 percent down payment, this insurance policy will be required and folded into your monthly payment. The down payment amount also affects the debt-to-income ratio on which your financial standing is measured. Lenders prefer to see no more than 36 percent of your gross income going to debt with housing accounting for 28 percent of your gross income.

The larger your down payment, the less debt and the better your debt-to-income ratio. This can also affect the interest rate and loan terms you can be offered.

Moving Down Payment Money

The mortgage lender will look not only at your income tax and pay forms but at your bank statements as well. By moving money and making it appear that new money has been added into your accounts, it can raise lender suspicions that:

  • you have taken out another loan
  • you have been given money.

Either event affects your loan application.

New Loan

Mortgage experts caution against taking out additional loans while in the mortgage loan application process. It will force a recalculation of your debt-to-income ratio, slow the application process and, possible, disqualify you for the loan. 

It will also cause a re-evaluation of the interest rate you have been offered.

Down Payment Gifts

If the moved money appears as a gift - or if you did receive a gift of down payment money - your lender will want to see documentation verifying there will be no repayment expected. If a gift cannot be documented as a gift, it will be viewed by the lender as a potential loan, and, again, your debt-to-income ration will be in question.

What to Do

The simplest way to avoid the problem of questions arising about the source of down payment money is to not move large sums in your accounts when you are in the loan application process. If the money was a gift, have documentation ready to show you do not have to pay it back. If it’s a loan, have the loan documents ready to show what you owe and what your payments are.