With the recent boom in crypto currency, many investors are looking to use their cryptocurrency wealth to buy a home. Some homebuyers are using their cryptocurrency to fund the down payment and closing costs on their new home; but there's a catch...and if you're unprepared, it can quickly lead to a swift loan denial.
If you’re unfamiliar with cryptocurrency, here are the basics: cryptocurrency an alternative international electronic currency that is untethered to the US Federal Reserve or any government. It protects—via encryption--the anonymity of the investor from traditional government oversight, hence the “Crypto” part of its name. It does not have the protection of Federal Deposit Insurance Corporation's (FDIC) deposit protection insurance that most US bank holders enjoy, even if they're unaware of this benefit. With crypto, you're operating on your own terms...and that's part of the character and overall risk inherent to this type of currency.
As of April 2021, there are literally over 10,000 different types of crypto currencies available to invest. Currently, the most notable are:
If you’re an investor in crypto, it probably won’t surprise you to learn that the traditional banking system (and the Federal government in general) isn’t really a big fan of this type of currency. In many cases, crypto is a direct competitor to the major banks and investment firms.
The thing is, Mortgage lenders are a big part of the traditional banking ecosystem. For instance, traditional conventional loan programs are based on rules and guidelines created by the two big government-sponsored entities, Fannie Mae and Freddie Mac. For government-insured loans such FHA, The Veterans Administration (VA), and US Department of Agriculture (USDA), they are also based on a system of rules and regulations that are intimately tied to the Federal government’s viewpoint.
Whenever you buy a home using a mortgage, your lender has a financial mandate from the Federal government to track your funds used for your down payment and closing costs. This involves a full review of the deposit activity from the most recent 2-3 months worth of all bank accounts, retirement funds, etc.
If you are applying for a traditional loan, lenders are not currently permitted to use cryptocurrency as legal tender for the use of down payment and closing costs. In fact, mortgage lenders treat cryptocurrency in the same way they do cash. When it comes to qualifying for a mortgage, cash is not an acceptable form of currency in a real estate transaction either.
If a mortgage underwriter sees a cryptocurrency deposit in your normal bank account and traces it back to its source, and learns that it’s cryptocurrency, they may remove it from the available funds needed to close which could affect your loan approval.
For instance, if your down payment and closing costs add up to $75,000 and you have $80,000 in your US bank accounts ($40,000 of which is from cryptocurrency), then the lender will only be able to count $40,000 in usable funds. As strange as it seems, this would leave you short on the funds needed for your closing, and your loan approval could be denied, even though you have the necessary funds sitting in your bank account.
You can safely use cryptocurrency to buy a home, but you will need to plan ahead and deposit those funds well in advance of your closing into a standard US bank account. This process is called ‘seasoning’.
Here are the the rules:
The answer depends on the type of loan program the applicant is for financing. Generally speaking, the general rules about cryptocurrency are the same for donors.
When there is gift funds being used in a transaction, three pieces of documentation are typically required when there is a gift:
Remember to follow these two things whenever you’re using cryptocurrency in a real estate transaction:
The smartest move you can make is to speak with your loan originator and tell them upfront if you’re planning to use cryptocurrency in your transaction—even it’s a gift from a donor. This way we can help you plan ahead, allowing you to have a smooth lending experience.
This is a relatively new topic in mortgage lending and many lenders and loan originators are unfamiliar with how crypto can impact your transaction. Here in Florida, we’re seeing cryptocurrency being used more and more….so you can trust in our expertise on the subject.
As always, if you’re looking to purchase, refinance or get preapproved to purchase a home anywhere in the state of Florida, we’d love to help. Simply give us a call so we run some numbers for you and answer all your questions!
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Yours in successful homeownership,
Unconventional Lending Program Director