At what point in the process of applying for a mortgage should I sell a mutual fund that I will use for the down payment on a house?
I am hoping to buy a house for $250,000, and I planning on funding $20,000 of the $50,000 expected down payment through the sale of a taxable mutual fund. I will pay the rest of the down payment with cash from a savings account. I've read that if there's a recent, large increase in your bank account, it can raise a red flag when you're applying for a mortgage. However, if I wait to sell the mutual fund until after I apply for a mortgage, will the lower cash balance in my savings account result in my being approved for either a lower mortgage or a higher interest rate? At what point in the process should I sell my mutual fund?
You bring up a couple great points in your question. When to sell your mutual fund?
I would sell when you know you are going to be buying place. Once you've found the property and are about to enter escrow or already in escrow. The risk / reward of holding the mutual funds longer just isn't there.
For the large cash into a bank accout issue. You will likely just need to be able to show where the "NEW" money in your bank account came from. Since it is coming from you own investment, won't really be an issue - just a little extra paperwork. On the other hand if this was money from parents or friend or whatever - you would want to have large chunks of money 2-6 month ahead of applying for a loan.
Best of Luck.
In general, I advise people not to have money that is needed for a down payment in mutual funds (Especially equity mutual funds). Well selected investments do well over time, but there is no telling what can happen in the short term. The extreme equity market volatility of the last few weeks being a case in point. It is best to plan for the down payment in advance so that you are not selling it at inopportune time and then deposit the money in safe and stable assets such as CDs (Maturity depending on when you plan to buy the house), money market funds and savings deposit.
As for the question of a sudden increase in your bank deposit- that should not be a concern if you show that your net worth is the same i.e. the deposit came from your investment account. The lender may want to see your transaction record. However, if the value of your mutual funds goes down considerably then yes, it can affect your ability to make the down payment, so you may want to sell it as soon as possible.
I disagree that a higher bank balance will make it more difficult to get a mortgage. As long as you are not borrowing money through other methods, the more you have in cash the better off you will be in obtaining any kind of a loan. I might recommend that you wait for a recession to occur first since then you will usually pay much less for real estate.
If you are planning on purchasing a home within the next few years, I'd recommend selling the fund now (especially if it's an equity mutual fund). Short-term needs shouldn't be invested in a volatile investment. Even bond funds can lose money over the short term, especially in an increasing interest rate environment. Instead, deposit the funds in an FDIC-insured on-line bank to get the best possible safe interest rate.
You'll have no problem with the mortgage company if you provide them documentation showing the source of the funds.
As long as you track the money came from an account you already owned, that shouldn't affect your ability to get a mortgage. What they don't want to see is something that is a big gift because that will look like you didn't save the money yourself and maybe aren't such a great credit risk. When you apply for a mortgage, they will want to see all of your investments, not just the bank account balance.
From a logistical standpoint, know a few things: First, when you sell a mutual fund, it takes one or two days to settle to cash in your account. From there, if you need a cashier's check, many investment companies are not banks, so you will need to arrange a bank wire from your investment account to your bank. Give this process at least a week. If the account is joint, expect that your spouse will need to sign some paperwork.
In other words, don't show up to your investment firm's branch on your way to closing expecting to just pick up a cashier's check from your mutual fund.