Are you a first time home buyer wondering how much down payment is required to buy a house in the 2023 Housing Market? Where can your down payment come from when buying a house? What’s the difference between down payment and closing costs when buying real estate? In this episode, we take a deep dive into down payment to give you a birds eye view of how much down payment is required, where the down payment can come from and what you need to know to become The Educated HomeBuyer.
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Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith
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For Show Notes, See Below 👇
[00:00:00] Jeb Smith, Huntington Beach Realtor: How much down payment is required? If you don’t have it, where can you get it? And what are some things that you shouldn’t do with your down payment? That’s what we’re gonna talk about in today’s episode. And with that said, we’re gonna give you a bird’s eye view of down payment. And the reason I say bird’s eye view is because.
This episode could be an hour plus. If we dove into the intricate details of down payment and with talking about down payment and different loan programs, we kind of go more specific on those particular loan programs. So today it’s an overview of down payment should give you a really good, just of what you need to know when going through the home buying process.
But Josh, where do you wanna
[00:00:39] Josh Lewis, California Mortgage Broker: start? Why don’t we give an overview of all of the loan programs because there are many and there are little subtle differences in nuances and even just some of the things you’ll see, the details we’re gonna talk about, there’s some confusion or misunderstanding about those.
So let’s start with the easy ones, Jeff. The two that require no down payment, but do have special requirements of you to be eligible for that. The first most well known and most obvious is the va. If you are an eligible veteran, you can get a VA home loan with zero down. Now if you put more money down, you’ll get a little bit better funding fee, which is basically an upfront amount that VA charges in lieu of mortgage insurance because they don’t have a monthly mortgage insurance.
But you’re not required to put any money down. Most veterans don’t put any money down, at least on a first time purchase. The other one is a USDA loan. The specific requirement on a USDA loan to be eligible is not an a requirement of you, the borrower, it’s a requirement of the property.
It has to be in a USDA eligible area that is defined as rural. For us in California, as the population grows and expands, we have less and less areas and that’s not anything unique to California. I have family in North Idaho in areas that for years were USDA eligible.
Over the last 6, 7, 8, 10 years have lost that rural characterization where they’re no longer eligible for USDA. So that’s sort of an easy button. If you’re a veteran or you’re buying in an area that is U S D A eligible, you don’t have to come up with any down payment. Both of those are a minority of loans, so they don’t really apply to most people.
So with that, Jeb, when you start looking at what are low down programs. Now, most of these are not limited to first time buyers, but we get the question, what first time buyer programs do you have? What low down payment loan programs do you have? One that is very common, very prevalent is the FHA loan, FHA 3.5% down.
On the conventional side, so Fannie Mae and Freddie Mac, they also have 3% down options. The Fannie Freddie 3% is used less commonly than the FHA usually because the interest rate plus the mortgage insurance makes the payment higher than an FHA, and those loans are less flexible than an FHA, especially in regards to [00:03:00] today’s topic of sourcing the down payment and coming up with your funds to close. FHA is a little bit easier.
So want to pay special notice there to conventional loans. So with the conventional 3% down, you either have to be a first time buyer, that makes you eligible for the 3% down financing, or you need to be eligible for either home ready or home possible. So we have income limits on those.
So a non first time buyer that meets the income limits for home ready or home possible can do 3% down. If you don’t meet those requirements, you have to be a first time buyer. You can go 3% down.
The important thing to note for us in Southern California, most Southern California counties are eligible for what are called high balance loans. We have the standard loan amount in the United States right now, so we can go to $726,200 in any county on a Fannie Mae, Freddie Mac loan.
In high cost counties, you can go as high as 150% of that. Long story short, if you go above the standard balance threshold, Jeb, you have to come up with 5% down. The 3% down is no longer an option. So for the majority of borrowers and probably 95% of first time home buyers, those four loan types are going to be the most common. VA, USDA and more commonly FHA and Fannie Mae.
So you’re looking anywhere from zero down if you have one of the special programs to three to three and a half percent down for most first time buyers on conventional or FHA.
[00:04:34] Jeb Smith, Huntington Beach Realtor: Now, in addition to that I know our primary audience probably isn’t looking at buying investment properties, but in an investment property, what kind of down payment are we looking at? If you’re looking to buy a property to and turn it into a rental, if you will.
[00:04:47] Josh Lewis, California Mortgage Broker: A single family property, a single family residence or a one unit condominium. The townhouse, those properties, you can buy those as an investment with 15% down. Pretty rare. I think I’ve done one in the last five years because interest rate is really high.
Mortgage insurance is really high, and as an investor you’re looking at cash flow.
Those two things will kill your cash flow. Makes it pretty difficult to justify. If we go to 2, 3, 4 units, you’re gonna be looking at 25% down with Fannie Mae and Freddie Mac. FHA, VA obviously don’t allow investment properties.
There are private lenders, portfolio lenders, non QM lenders that will go into that space that you can do less down. But again, those aren’t used quite as commonly as Fannie/ Freddie financing.
[00:05:32] Jeb Smith, Huntington Beach Realtor: All right, so let’s talk about something that a lot of people often have questions about Josh with regards to down payment is where can that down payment come from?
Does it have to come from a checking account? Does it have to come from a savings account? So where can it come from? If you don’t have it, where can you get it?
[00:05:51] Josh Lewis, California Mortgage Broker: The requirement, Jeb, is that it be sourced and seasoned, so it’s from a valid source and we have the seasoning on it. So let’s talk [00:06:00] about the valid source.
The easiest one are your liquid accounts, checking, savings, you mentioned. A money market account, a CD that’s eligible now for withdrawals and not locked up. And from the lender’s perspective, they don’t care. If you have a 12 month cd and it’s one month into it, you can use that. What it will require us to show the money coming out of there. And you may end up taking a haircut or at least giving up some of your, your interest on that.
So all of those are liquid funds in your name. Not a problem whatsoever. So we then get to, if you have invested funds, we may have to paper trail those funds coming out to show that the investment, let’s say you get a bad time in the market, that you had $50,000 in your account. Market goes down 3% last month.
We might have $49,000. We’re gonna need to show it coming out. We’re gonna show the balance of the account when you took it out and that it came out of that account, but totally acceptable funds. Now we can also go to retirement accounts. The question then becomes, if you are not of retirement age, there’s gonna be taxes and penalties on that.
So for the most part, we either have to account for that and not give you the full balance of the funds or, what happens more commonly, clients choose to borrow from those funds. You can borrow up to 50% of your balance in your 401k to come up with your down payment. There’s limits on the total amount of that, but again, for our first time buyer that needs 10, 15, 20, 25, $30,000, you can borrow from the 401k, totally acceptable source of funds.
Don’t have to hit you with any repayment on that. We do have to document the balance, that you have it available and then that is where the funds came from. So you may, Jeb have noticed, like I kept referencing we have to document that that is where the funds came from.
If we show that you have $42,000 in your 401k, and then you have $20,000 show up in your account. We have to show that it came from there. If it’s just a cash deposit, if it’s just we don’t, can’t connect the dots and show that it came from there. The underwriter, our underwriters, are always gonna fall back to what’s the worst that could happen or what’s the worst source that could have been the source of these funds if you went out and borrowed it, borrowed those funds.
That would be not necessarily problematic, but it could be problematic and it definitely would have a repayment on it that we haven’t accounted for in your debt to income ratio. So the seasoning and the sourcing, did it come from a valid source? Have we had it in your account long enough that we know that it’s there and there’s not the potential for ineligibility of those funds or a payment related to those funds.
[00:08:43] Jeb Smith, Huntington Beach Realtor: Now what about things like gifts? What about things like, uh, loans? Taking a loan from your credit card? I often, You know, every month in the mail I get some sort of credit card offer to transfer my balance and they give me checks and whatever with some of these [00:09:00] offers. Can I write a check on a credit card and use that as my down payment?
You know, cuz this is one of the questions that a lot of people have out there and then on top of that, we got a question this week, can the seller give me my down payment? Can they gift me my down payment? So I, in the idea of talking about gifts and loans, where do we stand, Josh?
[00:09:19] Josh Lewis, California Mortgage Broker: So let’s separate out the two. The loan is fairly easy. Unsecured, borrowed fuds are not an unacceptable source of down payments. You specifically mentioned a credit card. Does that mean that we can never use them? No, but just hold the thought for a second that unsecured borrowed funds, so meaning a credit card where there’s not something that you’re borrowing against, an asset that you’re borrowing against, generally not eligible.
Now secured borrowed funds. We’ll have a situation where someone has a classic car or just a third car that they paid off, and then hey, the car’s worth $20,000 in a crazy environment where used cars are worth a ton right now and they go take a $10,000 loan against that.
Totally acceptable. We show the clear title, we show the terms of the loan. We show that’s where the funds came from. Now we have sourced in seasoned funds. We count for the payment in your debt to income ratio and it’s totally eligible.
That could be an rv, a boat, it could be another property. Anything that is a secured loan, you’re going to be fine. Now crazy thing, my business credit card started out as a $15,000 limit, and I’ve never asked for an increase in the limit.
And I look up a couple months ago and it’s like an $80,000 limit on the credit card. It’s a lot of money. So if I were to go buy a house and I wanted to pull $40,000 off of it, I can do that. Lender is not going to accept it because it’s unsecured borrowed funds.
Now what if I took $5,000 off of that, cuz I was a little bit short and put that into my account. In terms of Fannie Mae and Freddie Mac guidelines and FHA, in terms of sourcing and seasoning deposits, large deposits, they all have different views on what is considered a large deposit.
For the most part, if a deposit is less than 50% of your monthly qualifying income, we should be able to not source it.
So let’s say qualifying household income, you and your spouse both make $60,000 a year. So $120,000. We got $10,000 monthly income. That $5,000 is right at 50%. So can we sometimes pull some money out of a credit card? Yes. Can that cause some issues? Lenders, we had this question come up, Jeb. Lenders are always doing undisclosed debt monitoring throughout the process and they may do a credit refresh.
They’re not gonna pull a new credit report, they’re not gonna get a new credit score. But they can see that that balance jumped up and go, Hey, what happened here? We need to account for that and put it into the debt to income ratio. So for the most part, unsecured borrowed funds not acceptable, but sometimes we can play with that at the margins. Secured borrowed funds definitely acceptable.
[00:11:58] Jeb Smith, Huntington Beach Realtor: So you’re… serious question, [00:12:00] do people really borrow against, like paid off cars? And boats?
[00:12:04] Josh Lewis, California Mortgage Broker: I’ve had it happen before. It’s very rare, but yeah. Yeah. You know, a lot of times I’ll have someone who just like, they were aggressively paying off debt. They might have a nice car that’s relatively new, $50,000 car, and they paid it off aggressively over the last 18 months and they go, “oh, hey, I actually wanna buy a house and it would be better to have money in the bank than to have rapidly paid this off.”
Or someone has a, a super bitchin’ RV or boat and we’re like, okay, we’re a little short to close we’ll go get some… So it does not happen often, but yeah, it absolutely does happen.
[00:12:34] Jeb Smith, Huntington Beach Realtor: All right, so we’re gonna talk now about gifts, from a family member, friend. Is that feasible? Maybe two different things there when we’re talking about family and friends. Can the seller give you a down payment? Or a gift rather.
[00:12:44] Josh Lewis, California Mortgage Broker: We probably should do an entire show on gifts. So right now we’re gonna do, like you said, the 10,000 foot overview of it. For all of your owner occupied loans, so not jumbo, not weird non QM stuff, but you are getting an FHA, VA, Fannie/Freddie, USDA loan, they will all allow gifts for both your down payment and your closing costs.
You do not have to come up with any portion of the money on your own. It can all be a gift. They all have slightly different requirements on who is an eligible gift donor.
In general, a family relationship or family type relationship or longstanding interest in the borrower would make you eligible a as a gift donor. So Jeb, you and I have known each other for 15 years now. So if I go to buy a house and I don’t have any money, and you want to give me that gift because you like me and my wife, I might have to give a little more detail on that cuz it doesn’t just say brother or father on the gift letter, but you would be for most loan types an acceptable source of funds.
But what do we see most common? It’s parents. Um, Fiance, uh, that type of situation, that’s usually a pretty tight and close relationship, and those are always acceptable. Now, you are asking about a specific type of gift. Can a seller give you a gift of their equity? And you didn’t even say just a gift of equity.
What if the seller’s got a million dollars sitting in the bank and they want to give you $25,000 for your down payment? Only if they meet one of those categories. So if you have never met the seller, you do not know them, and you go, “Hey, I hear you’re doing really well and you don’t need all of your proceeds from this, would you give me a gift of equity? Or would you give me some of your money in the bank?” And somehow they agree.
That’s not going to be acceptable. You have to come up with your own down payment. They can credit your closing costs. They can credit your prepaids. They cannot cover your down payment unless you have one of those longstanding relationships where they would be eligible as a gift donor.
[00:14:52] Jeb Smith, Huntington Beach Realtor: All right, let me play devil’s advocate here. Who is the down payment police? Who is gonna say, Jeb, you don’t know this seller. They’re not a [00:15:00] family member. They’re not your cousin. Anyone? Or is it just, going off of your word is your bond, if you will?
[00:15:07] Josh Lewis, California Mortgage Broker: Well I won’t call it the honor system or your word is your bond, but you are signing a gift letter and stating what the relationship is under penalty of perjury.
So if in that situation, Jeb and I have never met and I’m buying his place, and he goes, “oh, we were fraternity buddies in college and I’m giving him the gift” I have perjured myself, committed fraud in the loan. And if anything ever went sideways, are you likely to ever see an audit or someone come through and find that out?
Highly unlikely. But if they did, there is fraud in the file where the lender can come back and go you owe us this money. We can call the loan due. You lied on your loan application.
[00:15:40] Jeb Smith, Huntington Beach Realtor: There you go. So all you thinking out there that you can get around it, you know, just keep that in mind. Now, Josh, say you’re me.
Say you’re a self-employed business owner. You have an S corp business account where the majority of your funds go into, right? So all my business dealings, everything kind of funnels through that main business account. Now I have a personal checking account, personal savings account, and I pay myself monthly, but the bulk of my money still stays in the business.
If I am buying a home, how does the bank, if I wanna pull that money through my business, if you will, because it’s an s cor, it can pass through to me. Can I use that money in my business account to buy a house with down payment? And if so, how do they look at that?
[00:16:26] Josh Lewis, California Mortgage Broker: We have to show that it doesn’t impact the liquidity of the business. Let’s say you’re not, you’re a real estate broker, but let’s say you were a used car dealer. It’s a wonderful market right now. Used car prices are up. You need. $300,000 of working capital to buy and sell cars. And you say, “Hey, I’m gonna take 250,000 of my working capital and buy a house.”
That would be a problem. In your instance, your money in the bank is generally retained earnings. It’s nice to have there as a cushion, but if you take that, it is not gonna hinder your ability to do your job. So a couple of things that the underwriter’s gonna be looking at. Does it impact the liquidity of the business and its ability to operate taking those funds out of the business?
And secondarily, are there any owners? So let’s say Jeb, you and I are partners in a real estate brokerage and we have a business account. Well, we’re 50/50 on the K1 in terms of ownership, well, why is Jeb able to take $250,000 of the $300,000 out of the account? It can be a bigger question, but for the most part, again, for this conversation, our audience on the show, a majority of our, our audience is people that are looking at buying their first home or buying an owner-occupied residence.
And in terms of that, those types of borrowers generally smaller businesses that are not requiring the big user capital, it’s rarely a problem on your standard Fannie/Freddie, FHA, VA loan for us to use business funds. But it’s not as simple as saying, Hey, it’s always OK.
[00:17:49] Jeb Smith, Huntington Beach Realtor: Got it. So, earlier you mentioned when talking about sources of down payment, talk about the idea of seasoning it, being in an account for a certain period of time and being able to document that. [00:18:00] What happens, cuz we have this scenario happening right now with a client, what happens when a client has money in multiple accounts.
Say they have five different checking accounts, an asset account, a retirement account, whatever, and they start moving funds around to get the appropriate amount in one account or in multiple accounts to be able to bring that money into closing when they’re closing costs in their down payment are actually due.
Am I having to source all of this stuff? Like what’s the process?
[00:18:28] Josh Lewis, California Mortgage Broker: So let’s use a different client of mine that I have right now, that, uh, husband and wife, they got married later in life, so they maintained separate assets and he also has a large chunk of their assets in his retirement accounts.
He’s of retirement age, so he can take it out without penalty. So let’s say. Checking one, checking two, retirement accounts. And they wanted to move all of the money cuz some of the down was coming from each of those three sources. They said, “we’re gonna make it super easy, we’re gonna move it all into the credit union account and then we’ll wire in our closing funds from the credit union account.”
I said, “Big problem. There’s not enough in there right now. So if we have just one wire coming from the credit union, the underwriter’s gonna look at it and go, you didn’t have enough money in the credit union account. Where did the money come from for the down payment?” So I told them, you have the option. We can move the money in there right now, which is what you’re planning on doing, but we have to document it.
We have to show it coming out of the source account into the account that you’re going to make the deposit to escrow from. Or, we can just take three wires straight into escrow from the already sourced and seasoned accounts and the underwriter is going to go, “okay, we took 50 from here, 50 from here, and 150 from here. And we’re good with that.”
So preferred route is probably to do that. The other client, Jeb, that you were talking about specifically did nothing wrong. He did nothing wrong. They’re making a large down payment. 800 credit score borrower, big down low debt to income ratio. Underwriters should be thrilled to be getting this loan. Lenders should be thrilled to getting this loan.
Well, we finally get all of the funds sourced and it looks like we’re about $4,000 short, uh, of exactly where we need to be in terms of closing. He goes, Hey, no problem. Let me just send you a printout over cuz you can see we’ve got way more than enough to close.
The printout comes over and he did consolidate all of the funds from all of the different accounts into one account. So now we’re gonna go back and go show me those funds.
Thankfully it was three different accounts that one, credit union, credit unions generally put all of the different accounts on one statement. So that one is, is fairly easy.
But let’s say he had five different bank accounts we could be having a heck of a load of work to show that all of those funds came back together. Another piece in there, Jeb, that’s probably worth talking about. $10,000 cash deposit listed in there. And we look at that and go, okay, I get it.
And his exact case to me was, Hey, in our culture, this is very, very common. I go a thousand percent. In Southern California, we deal with lots of different cultures, subcultures, ethnicities, [00:21:00] and different folks have historically handled things differently. I said a hundred percent. See this all the time.
I wish we had known about it before it just popped up and we could have discussed this a little bit more and it would’ve been less of an issue. We’re gonna get over it. It is not going to be a problem. Again, this is a very good borrower with plenty of funds. It’s just even in that situation, Jeb, it is very important to be aware that the underwriter doesn’t just go.
Oh, you know what? These guys are super well qualified. I’m not gonna worry where that last $4,000 came from. We are going to document every last penny. And if it sounds silly and absurd, it is silly and absurd. And if it sounds like it’s a pain in your butt, totally get it. Totally understand it. It is worse for me.
Worse for your loan officer I should say. Because I don’t know everything about your accounts and your assets and where things are.
So long story short, Jeb, the best, best, best thing you can do if you’re not the person that uses one checking account or a checking and a savings at the same institution or the credit union where all three accounts are on one statement, please go through all of your thoughts, ideas, and plans with your loan officer at the beginning of the transaction saying, here’s where all my money is, here’s where I would like it to be and where I’m going to bring it into escrow from.
[00:22:12] Jeb Smith, Huntington Beach Realtor: No, absolutely. Now, is it similar, is it normal rather for somebody giving you money?
So let’s take the instance earlier where I’m giving you a gift for the down payment to buy a house. We’re close friends for, you know, however many years, and it’s, I’m an eligible source. I give you down payment. Is it normal for the bank to then ask me to be able to source where my money came from even though I’m not part of the transaction, I’m just gifting you money.
Do they wanna see where my funds came from that I gave to you?
[00:22:42] Josh Lewis, California Mortgage Broker: Yes, because let’s go back and let’s say in this exact instance that Josh goes and borrows $25,000 from the payday loan company, whatever it is. Unacceptable. Unsecured, seasoned funds. And I go, “Jeb, I’d like to give you this $25,000, and you give it back to me to source it.”
They’re going to want to see that you had it. Now, how do we do that? It can be very easy or slightly more difficult. On conventional loans, you wiring the funds into escrow from your account is showing that you had the funds. So I don’t need a bank statement. Don’t need two months bank statements. Don’t need any of that.
So you can sort of get around what I was just talking about. I can go get an unsecured $25,000 loan, hand it to you, you wire it directly into escrow and it’s sourced. But let’s say Josh is getting an FHA loan in that situation. FHA doesn’t allow the wire to be the sourcing of the funds.
I hand you that. $25,000. They’re gonna say, cool, get me two months of jeb’s statements. Generally one month. But let’s say that I handed you the $25,000. We have the big down payment. Now we have to go a little bit deeper. So on an FHA loan, government loan, you are likely to have to provide the donors
ability to gift, which is most commonly done with a bank statement. We can also get a verification of deposit or a letter with all of the pertinent [00:24:00] documentation from the donor’s bank account. We talked about Jeb, the other specific type of gift, a gift of equity. They’re not actually giving you cash.
There’s a credit that closed. You’re buying your parents’ house and they’re crediting you $50,000 of their equity. Basically, their proceeds are being reduced by 50,000, and there’s a credit on your side of the ledger for $50,000. We know where that is. It’s coming out of equity of the property that doesn’t need to be sourced.
[00:24:25] Jeb Smith, Huntington Beach Realtor: Good stuff. Now let’s talk about the idea of closing costs. Closing costs are a little bit different than down payment, but in addition to oftentimes. When we’re talking closing cost, let’s talk about where those funds can come from. I guess the better question is, can it be any different than the down payment?
Is there an eligible source for closing costs that wouldn’t be eligible for, say, a down payment? .
[00:24:47] Josh Lewis, California Mortgage Broker: Yep. Interested party contributions. It’s a fancy word for lender, seller, agent credits. So in that situation you’ve seen before, seller can give you a credit. There’s limits on it. With a conventional loan, less than 10%, up to 3% of the purchase price, over 10%, it can be six to even 9% of the purchase price.
So fairly large contribution directly from the seller. And it’s the same thing. It’s gonna be a debit on their side of the closing statement from their proceeds, a credit over to you.
Your agent is also an interested party. They can give you a credit. The agent on the other side of the transaction, the listing agent, Hey, I don’t want the deal to fall apart. You’re $2,000 short. They can give you a credit.
We still have those same limitations. I didn’t mention FHA up to 6% total credit. So, pretty large amounts. You can get a lender credit. To get a lender credit, the lender doesn’t just go, “Hey, we really like Jeb. We’re gonna give him some money here at closing.”
You’re generally taking a little higher interest rate. They’re gonna make more over the life of the loan. They give you some money upfront at closing. So seller, either agent and the lender can give you a credit to get rid of closing costs. But let’s say you get a $30,000 down payment, $15,000 of closing costs and prepaids.
So we’re at $45,000 and you get a $5,000 seller credit, $5,000 lender credit. Well, we’ve got, still have our $30,000 of down payment and $5,000 of the closing costs you’re gonna pay on your own. We have to source and season those $35,000. So you’re a hundred percent correct. Closing costs and prepaid items, taxes, insurance interest, that stuff, those can all come from interested party contributions.
The down payment cannot come from an interested party, agent, lender, or seller unless you have one of those longstanding relationships with the seller and they can give you a gift of their equity.
[00:26:38] Jeb Smith, Huntington Beach Realtor: Okay. Yeah. So let’s talk about when are down payment and closing costs due. When do you need to actually have access to some of these funds?
Because that’s something that often comes up. People have money sitting in stock accounts, right? They hold a couple thousand shares of Apple, that’d be nice, right? And you’re ready to close or you’re just going under the, into the escrow process, right? You’re, you’re just got your offer [00:27:00] accepted.
You have to put an escrow deposit into escrow, which we’ll talk about here in just a moment. But when do I need to pull from these accounts? When is it a good idea to start thinking about having this down payment handy and in cash, Josh?
[00:27:15] Josh Lewis, California Mortgage Broker: So generally you’re gonna send funds to escrow two separate times. At the beginning, your deposit, which Jeb, when you write the contract, you guys have said, we’re gonna make a $5,000 deposit.
We’re gonna make a 3% deposit. Yeah. Whatever that is. In what timeline do you have to get that into escrow per the contract?
[00:27:33] Jeb Smith, Huntington Beach Realtor: So, well, California, it’s, it’s within three days. So within three days of a fully executed contract, you have to have that money into escrow, that good faith deposit. It’s called different things in, in different parts of the country.
But within three days, that initial deposit is put into escrow. And something to note here that people often get confused by is that the escrow deposit is part of your down payment and closing costs. It’s not in addition to, and what I mean by that is if say you’re buying a $500,000 home and let’s say you’re putting 10% down, that’s $50,000.
Well, let’s say as part of our contract, we wrote that you were putting a 3% deposit up front. That $500,000 home, so that’s 15 grand. So that $15,000 that you’re putting in up front will come out of that $50,000 that you need at the close of escrow in order to close that on that property.
So just something important to note there, because people often get confused and think they need the down the deposit in addition to the down payment, and that’s not true.
[00:28:35] Josh Lewis, California Mortgage Broker: Well, Jeff, that’s one of the number one questions we get towards the end of the transaction. “No, no, no, no, no, no. I already put a $10,000 deposit. Where’d that money go? Where’s my $10,000?”
So for those of you who took accounting 101 in your first year of college, ever took a bookkeeping course. Escrow is basically doing simple dual entry bookkeeping.
There’s debits and there’s credits. So the debit you are charged for the purchase price of the home and all of the closing costs.
You’re gonna get credited your loan amount. There’s the piece of that. Then you’re gonna get credited any seller, agent, lender credits on there and any other credits that you may have throughout the transaction. But you’re literally just looking at that. One of those credits will be your initial deposit. So if your contracts had a $10,000 deposit, there’s going to be a deposit over there of $10,000.
So the funds to close at the end of the transaction are gonna be reduced by the amount of your initial deposit. Very important to look at. So that is your initial deposit. In general, we only make one other deposit to escrow, and they’re gonna go through and do all that accounting. They have gathered all of the charges, all of the costs. Escrow title, appraisal, credit report, any lender fees.
They know the exact loan amount and they’ve gone through and done all the debits, all the credits. And they say, here is your balance still owing, which as we already said, has been reduced by a credit for your initial escrow deposit. [00:30:00]
[00:30:00] Jeb Smith, Huntington Beach Realtor: Good stuff. So now let’s talk about that second deposit cuz you kind of mentioned how the first one works.
Second deposit is typically the remaining balance that is due from that initial deposit with the closing costs added. When is that money due? When do you need to have access to it, if you will? How does that money actually get to the bank at the end in order to close the transaction?
[00:30:21] Josh Lewis, California Mortgage Broker: The preferred method is for it to come in by wire.
That way we sort of have the paper trail of where it went. We’re not waiting for a check or a cashier’s check or any of that fun stuff to clear. We have good funds in the Escrows bank account with them ready to close. We have these funds coming in hot occasionally. Not often. We don’t like that.
But are we sometimes sitting here waiting that that is the last item to come in? We are completely ready to fund, waiting for the buyer’s funds to come in via wire and close. Yes, that happens. So in a perfect world, I would like to have it in escrow 48 hours prior to close. At least 24 hours.
But worst case, it can come in minutes before funding the loan. That can be the last funding condition from the lenders. Show me the funds were received by escrow from the buyer. We get that evidence over, the wire goes out and they fund the loan.
So people sometimes are aggressive. During 2020 and 2021 when the stock market was doing really well, if someone had money in their brokerage account, they’re like, when do I have to take this out?
I wanna let it run. It keeps going up, up, up. The flip side can happen. It can go down, down, down, also. But you don’t have to have that final amount until the the closing. So we talked about gift letters. When do I have to have my gift. Hey, for me, in a perfect world, I wanna wire it into escrow at closing. So again, about 48 hours prior to closing.
If we’re having to liquidate assets, we probably want to do it seven to 10 days before closing so that it’s available in your hands and ready to wire into escrow 48 hours prior to closing. Uh, a lot of this comes down to your tolerance for stress and your tolerance for inflicting stress on the other parties of the transaction, such as your lender and realtor like Jeb and myself .
[00:32:06] Jeb Smith, Huntington Beach Realtor: So hopefully you guys found some value in this. If there’s additional questions that we didn’t answer, there’s an email in the description of the podcast, of the video, wherever you’re watching this, to be able to get in touch with us to ask those questions. So feel free to reach out there and if you’ve made it this far, we appreciate you listening.
I have had a bad voice coming out of allergies and other issues, so I know I’m difficult to listen to, but the fact that you’re here shows the dedication to becoming The Educated Homebuyer and for that, we are grateful. So with that said, we will see you soon. Until then, Adios!
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