Can you use an alternative currency, aka cryptocurrency, to buy a home - in real life? It sounds more like a plot from a Netflix series than real life, right?
It turns out people can use their cryptocurrency investments to help them buy a home. And, even more surprising, lenders are ok with it - for the most part.
What's the catch? Read on because we will explain how you can use cryptocurrency to buy a home. And that includes all the details that lenders require before you can use the digital coins to unlock your new front door.
Lender Guidelines and Cryptocurrency
While the world of cryptocurrency blossomed back in 2009, we never imagined it could become part of purchasing a home. Not if a mortgage was involved. But the times they are a-changing. And it only took a little more than a decade.
According to Inc. magazine, there are almost 1400 different types of cryptocurrency today. We won't be talking in-depth about the cryptocurrency market in this article. Still, the bottom line is it's grown exponentially in value over the last few years, despite a rocky, roller coaster ride up along the way.
And individuals who invested fiat money (government-issued paper money) in some cryptocurrency in the past may have seen an increase in its' value high enough to buy a house. Does that describe you or someone you know?
Great news! But you need to know precisely how to use it to stay within underwriting guidelines. Otherwise, your lender won't approve your loan. So taking the proper steps is critical.
Fannie Mae and Freddie Mac only recently began allowing the use of cryptocurrency as part of a mortgage transaction. And then only by allowing borrowers to use it as a portion, or all, of their down payment. If you rely on crypto investments for a part or all your income, Fannie and Freddie won't accept it.
So, to be clear, underwriting guidelines currently allow cryptocurrency to be used for the down payment. But not as income. Freddie Mac spells out clearly what's allowed in this Bulletin.
Take note that Freddie won't consider the use of cryptocurrency to repay any debts. And if any debts are secured by cryptocurrency, they will still need to be included in the debt-to-income calculation for qualifying.
Cryptocurrency and Your Down Payment
Yes, you can use your alternative coin to make the down payment on a new home. But you'll need to liquidate the portion you plan to use and turn it into paper money. Do this at least two months before you apply for a mortgage.
The most important thing to remember is that there's no such thing as too much documentation of your steps. Keeping a paper trail of your assets moving from one institution to another or from one investment type to another is standard for qualifying.
But, typically, even with non-liquid investments and assets, you can liquidate when you're in the middle of the loan process. You need to document the entire process as the funds move from an investment into cash and provide those documents to the lender for review.
It doesn't work this way with cryptocurrency assets. You'll need to do this instead:
- Start the liquidation process more than two months before you plan on applying for a mortgage.
- Use an App like BitPay or a cryptocurrency exchange such as CoinBase or Kraken. According to Bank.com, this is the easiest way to turn cryptocurrency into cash. Some steps need to occur as you cash out, including using the same bank account to receive the proceeds of the sale that was used for the original purchase.
- Wait for the liquidated cryptocurrency deposit to "season" in the account. That means you need two months of bank statements for the account to qualify for the loan - and you need to wait 60 days after receiving the deposit (seasoning) before you apply. A best practice is to have two months of statements beyond the actual deposit.
While it may not happen, you should be prepared for an underwriter to dig deep into your documentation. If your income and savings look too low, without the crypto funds, to have produced the amount you'll use - the underwriter may ask for more documentation.
Standard underwriting guidelines require documentation for deposits equal to or greater than 50% of your monthly qualifying income. Saying your income and savings are "too low" means the amount you have for your down payment likely didn't come from regularly saving a portion of your paycheck.
Now that Fannie and Freddie are ok with funds from a cryptocurrency investment being used for the down payment - don't panic if you're required to produce more documentation. You will be able to obtain bank statements that paint a clear picture. The underwriter may request proof, via documentation, showing where the funds used to purchase the crypto originated.
Cryptocurrency As Income
Will mortgage underwriting guidelines ever allow cryptocurrency to be used as qualifying income? Well - in just over ten years from the inception of cryptocurrency - it's made its way into Fannie and Freddie's guidelines.
We're saying there's a chance. (Definitely? Possibly?)
To prepare yourself for any future possibility - start preparing now. Think documentation and record keeping - as detailed as possible. Unfortunately, cryptocurrency exchanges do not currently provide any income tax documentation. They do report transactions to the IRS, though. What does that mean?
So what can you do? Go old school and keep a spreadsheet of your crypto purchases. Track the amount and date you exchange fiat money for crypto. Then do the same each time you liquidate the cryptocurrency into paper money. This will help you produce any documentation required.
If underwriting guidelines ever accept cryptocurrency income, it will likely need to have been claimed as income on your tax returns for at least two years. There's also a requirement that the income continues for another three years.
Filing income tax returns showing this income for more than two years is the likely documentation required, should this become acceptable to lenders. Just remember, to avoid short-term capital gains, hold your crypto investment for longer than one year.
We don't offer advice for investing at all - let alone in any particular asset class. But after almost 12 years, it looks like cryptocurrency has become a viable investment vehicle. Even Fannie and Freddie recognize it - and that's kind of amazing.