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Your down payment: Why the source matters

When you purchase a home, you need to do more than just produce funds for the down payment. You also need to document where the funds are coming from. Here’s why:

Assurance of sufficient assets
The lender is loaning you a significant amount of money for your home purchase. In order to stay in business, the lender, obviously, needs to be repaid for that loan, and will do everything possible to ensure that you intend to repay it. Knowing where the money for your down payment is coming from helps reassure the lender that you can afford to make all of the required payments.

More obligation of repayment
When you invest a significant sum of your own money in a down payment, you are less likely to default on your loan. If the lender allowed you to use your credit card, for example, it wouldn’t really be “your” money and you might not feel as obligated to repay it.

Less risk for the lender
The amount of your down payment also matters. If you’re putting down 50 percent, the lender is less likely to be concerned about the source of the funds (even if half of the money came from a gift) because you are investing a sizeable amount into the home. With so much invested, you are less likely to default on the loan. On the other hand, if you put down just a small percentage of the home purchase price, say 3 percent, the lender will be concerned about your level of commitment to the deal and will want to be reassured that the money is your own.

When you’re financing your home, expect the lender to ask all sorts of questions about where the down payment money is coming from. But don’t worry -- this is a standard part of the home buying process.

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