You’ve been saving like crazy for a home. You’ve sacrificed fancy coffees and nights out on the town for the past year to save for your downpayment, and you finally found the perfect home and a mortgage.
But don’t do something with that money to blow your chances or delay the sale before all the papers are signed and your bags are packed.
“This could have major consequences,” senior real estate investments analyst Allison Bethell at TheClose.com in New York City. The Close is a new kind of real estate website designed to give agents and brokerages strategic insight from industry professionals.
“You may no longer qualify for the loan so you would default on the contract which means the seller can hold any money you have already put down such as your good faith deposit,” she says.
If you use that money as collateral for some other high-risk investment, or even the purchase of a new car or just $1,000 worth of furniture, you could be messing up the whole mortgage process.
What should you do with the money you get for your downpayment before the closing?
“It’s important to keep your downpayment separate,” Bethell says. “You can have the title company or your attorney hold it in escrow, and note that on an escrow letter which each party receives.”
If you want to hold onto it yourself, you can transfer it to a separate account such as a savings account or withdraw it from bank and get a certified check made payable to the title company. That limits the chances of you spending it prior to settlement.
Also, don’t store your money in someone else’s account, even if it’s your mom or dad. The lender needs to know that it is you who is coming up with the money – not someone else. Also, if that person – such as your significant other – ends the relationship and takes all the cash in the account, you are left with nothing.
For those such as waiters or others who earn tips, should they just keep the money in their house that they are collecting for the downpayment?
“When waiters and other tip earning professionals earn tips, they are supposed to claim a certain percentage on their taxes so they could either put the money in the bank, get a certified check, use a safe deposit box or an at home safe,” Bethell adds. “They should keep in mind that if they have renters insurance, usually only a limited amount of cash is covered, so it’s not a good idea to leave cash in the house in case it’s lost or stolen.”
Don’t stuff it under your mattress, in a coffee can in the freezer or any other obvious places that thieves could find it. Also, remember that it has to be accounted for in an account so your lender knows it is there when it’s time to do the closing.
What other things should you not do with your downpayment?
First of all, you shouldn’t consolidate all your funds at the last minute. If your money is in several accounts or you haven’t sold the stocks you need to sell for the downpayment, don’t wait till the day before the closing to do it. All of these financial actions should be done at least a month or two before you apply for the mortgage. Everything will go a lot easier for you if the lender can see where the money is and where it will be on closing day.
What consequences could happen if you do something with your downpayment before the closing, and you don’t have enough that day?
Depending on the state and the agreement of sale, the seller may be able to sue you for breaking the contract as well, Bethell says.
“If the seller agrees, he or she may give you extra time to come up with the downpayment, but they could charge you a fee for each day you don’t purchase the home. Remember that the seller is paying taxes, insurance and other things on the home, so a delay may increase his or her expenses.
Besides the downpayment, how important is it to also build a housing emergency fund for when you finally buy a house?
“Having an emergency fund is so important when buying a house, especially first time home buyers who don’t know what to expect,” Bethell explains. “Things like a Homeowner’s Association assessment could come up or property taxes could go up, and you should have money in reserves to pay for house maintenance and unexpected repairs as well as high utility bills in the hot and cold months.”
As a homeowner, really anything that breaks is your responsibility to repair, and if you have the money saved to do so, you won’t go into debt trying to pay for it.
Also, if you are moving from an apartment to a house, you are going to need some of the basics like a lawnmower, shovel or snow blower, possibly appliances and new furniture, curtains and other things to make it a home.