Imagine thinking you have a down payment for a new home in hand, only to watch it shrink by $10,000 in a single week—not because you spent it, but because the cryptocurrency you planned to sell as funding suddenly tanked.
When saving up and finding money for a down payment, many of us will utilize a variety of resources and financial vehicles. Personal savings is the most common source of funding, but, particularly for first-time buyers, financial assets, gifts from friends and family, and inheritance are also used frequently.
Some financial assets and resources, however, are more volatile than others. Anyone who has money in the stock or cryptocurrency markets can attest that the last few years have been particularly up and down. As a result, your net worth—and the amount of money you can comfortably put toward a down payment—can fluctuate greatly even on a day-to-day basis.
The good thing about keeping your finances in volatile vehicles? You can make big gains quickly. The downside? You can lose them just as fast. Even a gift from a relative can disappear if circumstances or relationships change.
If you’re planning on utilizing your investments and cashing in on promises from family to put together a down payment soon, here’s what you need to know to have your money ready to go.
Outside of your own personal savings, whether you keep that in your bank account or in cash stuffed under your mattress, many forms of financial investment and resources are subject to some level of volatility.
“Your portfolio value fluctuates daily—sometimes your assets are higher, while other times they can be lower—and depending on when you need to liquidate them, your available down payment funds can vary significantly,” says Denese Carty, the East Coast divisional director at Churchill Mortgage.
Unstable markets, such as those for cryptocurrency, can fluctuate in value by the minute. But even more traditional vehicles like exchange-traded funds can see diminishing returns if the stock market has a bad day or week.
Volatility can take many forms. Perhaps you’re waiting on the sale of another home or your business, neither of which is a sure thing until the sale goes through.
Promises from others can be just as fleeting.
“Gift funds can certainly be volatile in nature. Sometimes relatives have the best intentions and believe they can contribute more than what ultimately materializes when it comes time to transfer the funds,” says Carty.
The timeline of buying a home is long enough that you should know well ahead of your closing date whether you have enough money to fund your down payment.
Typically, once you identify a home you want, you’ll apply for a loan from a mortgage lender, and the lender will underwrite you and ask for bank statements proving you have the funds available. If for any reason this isn’t the case, the deal falls apart.
But when exactly should this money hit your accounts? Experts are split.
“I typically recommend moving those funds into more stable accounts approximately 60 days before your anticipated closing date,” says Carty. “This advance planning helps keep your approval process smooth and predictable.”
Others say the sooner, the better—sometimes as quickly as right away.
“The minute you decide you are going to buy a home,” is when you should move your money to safety, says Jeff Lichtenstein, CEO and broker at Echo Fine Properties. “Do it once you decide to purchase, not when you are looking or after it goes under contract.”
The exact timing may come down to risk tolerance. If you have some wiggle room to gain or lose a bit of your investment before it turns into your down payment, you can likely wait, but you will want some cushion against volatility.
You might feel flush watching your investment portfolio climb, but lenders don’t care about your total net worth. They only want to see funds that are easily accessible, verifiable, and held at regulated financial institutions.
Those funds should be “seasoned” for at least 60 days—meaning they’ve been sitting in your account long enough to prove they’re truly yours and not borrowed. Many lenders will also require you to have reserves beyond just your down payment.
“Your liquidity needs to cover two key areas: your cash to close—which includes your down payment, closing costs, and prepaid items—plus any reserves required by your specific mortgage product,” says Carty. “Reserve requirements vary by loan type, property type, and other factors, so it’s important to understand your complete liquidity picture before you start house hunting.”
In addition, know that lenders will want to know the source of your funding. Large, sudden deposits from a few days ago will raise suspicions. Your financial picture should look stable and predictable when you’re applying for what’s likely the biggest loan of your life.
Let’s say you’ve been home shopping for a while, and based on the assumption that you’ll sell some Bitcoin in the near future, you can afford a down payment of $50,000. Then, the bubble bursts a bit and you’re only able to afford $40,000. This is a major hit to your buying power. What do you do?
“This is actually a common problem for many buyers. Oftentimes, they are ready to purchase that dream home and realize they will have fewer funds for a down payment than what they originally thought,” says Carty.
You have a few options from here. One is to sit on the sidelines for a bit and build your down payment back up. Another is to adjust your home search downward, spending less to buy a home.
If you have your heart set on a particular home, or what a certain amount of money can get you, Carty recommends looking into loan programs that offer lower down payment options (which will likely require mortgage insurance), local or state assistance programs, or working with an experienced mortgage professional who can help you save money via rate buydowns, seller concessions, or other ideas.
If you’re far along in the homebuying process when this happens, “Seek legal counsel and understand your options,” says Lichtenstein. “It’s best to make sure your head does not get stuck in the sand. Sometimes there are some hard money lenders who can supply some short-term or bridge loans, but maybe the best strategy is to get out of the situation.”
In other words, if you’re already under contract and can’t secure the funds, exiting the deal—even if it means losing your earnest money—may be better than taking on risky short-term financing.
There are very few sure things in life, and money kept in unsettled accounts is not one of them. When it’s time to start thinking seriously about buying a home, make a plan for taking your money out of those investments and putting it aside for your down payment. You might not maximize your returns on your crypto, but the peace of mind you’ll have of turning what you did make into a home is priceless.