How Using Your Latest Paycheck for a Down Payment Could Stall Your Mortgage

Are you saving up a down payment to buy a home? Here’s something you need to know: Your paycheck can work against your down payment-savings plan if you aren’t careful.

Buying a home requires precision planning, good income, good credit, manageable liabilities and a healthy down payment. Having as much as 3.5% of the purchase price can be a big factor for many families looking to get their piece of the American Dream. In some areas, it can be best to put down 20% of the sales price of the home.

Not all the money you save is created equal, however, and here’s why. When you save money from your paycheck (a good idea for personal financial planning in general), that money is not automatically eligible to be put toward purchasing a house. It’s called income from assets, and income from assets in the world of mortgage lending is frowned upon.

For example, let’s say you receive your paycheck and your net earnings is $5,000. That $5,000 must be in your bank account for a period of 60 days in order for that money to be considered what’s known as seasoned. The bank wants to see you had the ability to save the money on your own volition rather than depositing your income for cash to close. If you are currently in contract to buy a home, these funds, if needed, could delay your closing date. If you are not in contract, plan on keeping these funds in your account for 60 days if you intend to use them.

Using income for a down payment may might not seem like a big deal in the grand scheme of things with all the other aspects that go into buying a home. However, it will be looked at closely by the bank’s underwriter. Your cash to close can very easily set off a bank’s radar if you’re using every last hour you can to get your foot in the door.

If cash is your obstacle to buying a home, you have options. It may mean waiting to put an offer on that house until you have enough money in your bank account or writing a longer contract. Remember, every seller has different motivations and timelines for selling. You will need to plan with your lender to have the funds ready to go, then write the contract to make your home-buying plan a reality.

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Also keep in mind that mortgage lenders like to see good credit among applicants, so it pays to know where you stand before you apply. Good credit can also open the door to better rates and more affordable monthly payments. You can view two of your free credit scores, updated every 14 days, on Credit.com.

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