Can you use Cryptocurrency to buy a home?

​Can you use Cryptocurrency to buy a home?          

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 are planning to use your cryptocurrency to buy a home, here is what you need to know

What is Cryptocurrency and why is it different in terms of a mortgage?

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: 

• Bitcoin
• Litecoin
• Ethereum
• Ripple
• Stellar
• NEO
• Cardano
• IOTA
• Dogecoin

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.

How does cryptocurrency change things when it comes to getting a mortgage?

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.

How can I use cryptocurrency to buy a home?

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:

• RULE 1: If you are depositing the funds into your personal bank account, you must deposit all of the cryptocurrency that you intend to use a minimum of 60 days from the closing of your new loan. Greater than 60 days is highly recommended—the more time seasoning, the better. The best rule of thumb is make the deposit a few weeks before you get preapproved and start shopping for a home.  
• RULE 2: If you are self-employed, and you intend to deposit your funds into your business bank account, then you must deposit all of the cryptocurrency funds that you intend to use no later than 90 days prior to the closing of your new loan. Greater than 90 days is highly recommended—the more time, the better. Why are the rules for self-employed different? The reason for this extra month is due to a recent 2021 change to Conventional guidelines that require lenders to inspect 3 months of business bank statements when the applicant is self-employed.  Whether you're self-employed or not--if you deposit the cryptocurrency into your personal bank account, then simply follow the 60 + day seasoning in Rule 1 above.

Can I use cryptocurrency as Gift funds for a family member? 

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: 

• 1) A Gift letter signed by both parties in which the donor and the recipient agree that repayment is not expected nor required
• 2) proof of the deposit in the borrower’s bank account or a receipt from the title company if the donor sends the funds directly to the title company.
• 3) proof of the donor’s financial ability to make the donation. 

Here is what you need to know if you plan to use Cryptocurrency for Gift funds. 

• If the applicant is using Conventional financing, the donor can simply wire the funds directly to the title company in the transaction.  We do not inspect the funds further than that. This is the easiest route.

• If the applicant is using FHA, VA, or USDA financing, the answer is not as clear-cut.  Because these are government insured loans, the donor is expected to provide a bank statement demonstrating their ability to donate to the borrower.  Many donors find this process to be rather invasive, since they are not qualifying for the loan, but it's a requirement nonetheless. 
  
  If a mortgage underwriter inspects the donor’s bank statement and notices deposits from unknown sources entering the donor’s account just prior to the donation being withdrawn, they may ask for more information…and if the paper trail leads back to cryptocurrency, they may remove it from the donor’s ability to donate.  
  
  Now if the donor already had enough funds in their account to cover the gift, that’s probably fine; however if those cryptocurrency deposits were necessary part of the donor's ability to make the donation, you may need to find alternative sources if these gift funds are necessary to close the new loan.

Bottom line

Remember to follow these two things whenever you’re using cryptocurrency in a real estate transaction:

• Plan ahead as far as possible, and deposit your cryptocurrency funds into a US bank account for a minimum of 60 days or longer.  The longer, the better.  75 days from the time you get preapproved and start shopping is a safe timeframe.
• Take out more than you need, just in case.  You can always reinvest it back after you've bought the home, but you can't simply pull more cryptocurrency out if you need more. Be sure to account for both down payment and about 4% of the purchase price for settlement charges to be safe. 

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. 

WRAPPING UP...

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! 

You can also drop us a line HERE »

Yours in successful homeownership,

Derek Bissen
Loan Originator
NMLS#365627
Unconventional Lending Program Director