Today, we’re going to be talking about whether or not you can use cryptocurrency for your down payment or closing costs when qualifying for a conventional mortgage loan…the answer may surprise you – I know I was shocked when I heard it myself.
What exactly is the problem with cryptocurrency anyways?
Well, banks just don’t like it. Other than being in direct competition with a lot of what they do, it’s also a bit on the sketchy side. Because the blockchain that crypto is run on is anonymous by nature, crypto can be used in nefarious ways…like illegal activities which don’t really fall into the government guidelines for a conventional loan.
Also, Crypto is highly volatile. It can be worth thousands one minute and then drop 20% in one day. And when a real estate transaction takes 30 days on average to complete, it’s going to be pretty hard to tell what your crypto is worth by the end of the transaction even if you were open about how much you had when you started the home purchase or refinance.
If you were to go to a bank or lender, apply for a loan and when they asked for proof of funds you showed them your coinbase wallet they would honestly just laugh at you and tell you thanks but take your funny digital currency elsewhere.
So what are you supposed to do with your crypto?
Well, you have 3 options.
Don’t get a loan.
This is obviously an extreme example, but if you have enough money to buy a house in full with the crypto you’ve been able to acquire, then I say go for it. Buy the house in crypto and just avoid the loan altogether.
The good thing about doing it this way is that once you own the house you can actually get a cash-out refinance on the home, which is kind of a roundabout way of getting a loan on a house and I’ve done more than one cash-out refinance loans for high net worth people who paid for their house in cash. In fact, I’ve done WAY more than I ever thought I would have – who knew there were that many loaded people out there who can just drop hundreds of thousands or even millions on a property in cash – but they’re out there. I guess the rest of us have something to look up to, right?
Season your account
In order to use funds for a mortgage loan it has to be sitting in a bank account. It can’t just be cash under your mattress, it actually has to be money that you’ve acquired legally to qualify for a conventional loan. If you’re not sure what conventional loans are – make sure to check out this post where I go over the difference between conventional, hard money and jumbo loans – for the purposes of this conversation I’ll just sum it up by saying that conventional loans are the ones that are going to eventually be bought by Government Sponsored Entities down the line so when a bank lends money for a conventional loan they have to follow a set of super strict guidelines in order to make sure they can actually sell those loans to the government later.
The rule is that for any funds to be counted, whether it’s crypto or cash or gold you’ve got buried somewhere in the backyard, it has to be sitting in a bank account for 2 months.
How does that play out during underwriting you might ask? The underwriter, the person who checks if you qualify for the loan, is going to ask for 2 bank statements where the money has been sitting in your account. Sitting, not transferring.
So let’s say it was January first and you transferred a bunch of crypto that you liquidated into dollars into your account, that transaction is going to show up in your logs on your statement – that’s no good, no bueno. You need two months of that money sitting there for it to count, so in this case you would need to wait until February’s statement and then March’s statement where that money is shown to just be sitting there and not being transferred into your account.
If that money is shown as being transferred they’re going to ask where it came from and for a paper trail and if you show them that it came from a crypto account, your loan will be denied.
Now this isn’t really for your crypto but if you have a relative who has crypto. Banks understand that when you’re buying a house you might need some help with the finances from mom and dad or from a brother or cousin or your distant rich in-law that owes your mom a favor from something she did for them thirty years back. You are allowed to receive a gift from a relative for both the down payment and closing costs for purchasing your own home. This won’t work on an investment property, but it will on your own home.
Now you have to have a really savvy loan broker in order for this to work because some banks require proof of funds from your gift giver, and others just require that the funds show up in Escrow and they don’t require the proof of funds – which is what you’re looking for so be sure to talk to your loan broker to see how knowledgeable they are in this regard before pulling the trigger.
If you have a specific scenario you want to run by me, you can either put it in the comments and I’ll try to get you an answer as quickly as I can.