When buying a home, lenders need to verify where the money comes from. It is extremely important to document the paper trail of funds you use for your down payment and closing costs. If you can document that the funds come from your personal savings, the lender is more confident of your strength as a borrower. With the exception of "no asset verification" loans, The sections below provide guidance on both verifying assets and documenting them as a source of your down payment.

In addition, if you can verify you have additional assets that are not needed for the down payment, it is important to document those, too. Additional assets are "reserves" you can draw upon during times of trouble, such as unemployment, medical emergencies, and similar occurrences. Additional assets can also help to document that you have a history of saving money, which makes you a more dependable borrower.

Checking, Savings, & Money Market Accounts

The quickest and easiest way to document funds in your bank account is to provide your lender with copies of your most recent bank statements. Most lenders request two months bank statements. Some lenders still send a "Verification of Deposit" to your bank in order to determine your current bank balances and average balance for the last two months.

If the money you are using for the down payment and closing costs has been in the bank for the entire period covered by the bank statements, these are known as "seasoned funds." However, if your statements show any large or unusual deposits the lender will ask you to explain them and document their source.

Stocks, Bonds, Mutual Funds, etc.

Most of those who own stocks get a monthly or quarterly statement from their brokerage. You will need to supply statements for the most recent sixty or ninety days in order to document these assets.

If you have a physical stock certificate, make copies of the certificates and provide those copies to your lender. You might also want to supply tax records to indicate you have owned these stocks for some time.

If part of your down payment will come from the sale of stocks and investments, photocopy all documentation that applies to the sale. Provide these copies to your lender as well.
Savings Bonds

Savings Bonds are a financial asset, too. If you choose to cash them in for down payment or closing costs, you should do this at your local bank. Be sure to keep photocopies of the Savings Bonds and paperwork the bank provides to establish the current value of the bonds and show that you received their cash value.

Gifts

Lenders will require the donors to sign a special form called a "gift letter." The gift letter states the relationship between the parties, the address of the purchased property, the amount of the gift, and the source of the funds used to make the gift. The gift letter also clearly states that the funds are a gift and not required to be repaid. You should also make a copy of the check used to make the gift and the deposit receipt.

401K or Retirement Accounts

The 401K program is another asset you could draw upon as reserves in case of a problem. Just provide a copy of your most recent statement to your lender.

Many people use these accounts as a source of funds for their down payment, too. Some employers allow you to "cash out" a portion of the 401K and some allow you to borrow against it. Be sure to keep copies of all paperwork involving the transaction.

If you are borrowing against your 401K, some lenders will count this as an additional debt. From the lender's viewpoint it is still a monthly obligation that you must come up with and should be taken into account. If you are "tight" on your debt-to-income ratios in qualifying for a home loan, this could be an important consideration. It may affect whether you choose to cash out the account and pay any tax penalty, or simply borrow against it.

Employers

Some companies provide down payment assistance for their employees. make copies of all the paperwork, including a copy of the check and the receipt when you deposit the funds into your personal bank account. It is important that these funds do not require repayment.


Personal Property

Personal property includes vehicles, furniture, heirlooms, antiques, art, clothing, etc. The mortgage application asks you to estimate the value for these items.

The larger the loan amount, the more important it is for you to provide details on your personal property. Larger loans usually indicate larger incomes, and lenders check to see if your personal property matches your income. If it does not, this sends a "red flag" to the underwriter and they take a closer look at your application.

You are not required to document the value of personal property unless you intend to sell them to come up with your down payment.

Selling Personal Property

For those homebuyers who do sell personal property in order to come up with their down payment, the verification process can be arduous. Lenders are much stricter about documenting this method of coming up with your source of funds.

Selling a car is perhaps the easiest to document. You will need to photocopy the registration, the page in the "Blue Book" showing your model and its value, the bill of sale showing the transfer to another individual and a copy of the check used to purchase the vehicle. Make a copy of the receipt when you deposit the funds into the bank.

Other types of personal property are more difficult because you have to show that you actually own the property and that it has the value that you sold it for.

If you have records to show you purchased the property, that would be helpful. You could also provide an old inventory that documents ownership. To determine value, you may have to contract with an independent appraiser or a specialist who has the knowledge for that particular type of property.

If you cannot document the item's value, the lender will not view the sale as an acceptable source of funds.