Fannie and Freddie Weigh In
The future is here. People now buy homes with bitcoin. Some of the most upmarket real estate listings accept top cryptocurrencies and even showcase blockchain-based digital art inside the home. (The art concept is pretty intriguing. People buying digital art as part of a home could build massive collections of and rotate the individual pieces with a click of an iPhone.)
Most people who have the digital assets to buy, furnish, and decorate a home, though, do this after converting the coins to cash, and making a cash offer.
What about working with lenders? Will they understand, say, bitcoin as a legitimate asset of the cryptocurrency investor who wants it counted when seeking a loan approval? Let’s get into all of this now.
Mortgage Backers’ Crypto Policies: A Current Rundown
With some non-qualified loans, you can use your cryptocurrency to buy any home. A recent cryptocurrency account statement works as documentation, says mortgage broker Jeff Lazerson, for your down payment. Money down and closing costs plus required cash reserves can even come from gifts of cryptocurrency. You’ll convert crypto assets into dollars and wire the funds to the escrow account, as in the usual process. You only need a FICO score of 700+ for a down payment of 25%+. For those with a score of 660+ the minimum is 45% down. Interest rates may be 5 to 6 percent.
Fannie Mae loans are accessible today for borrowers who use their cryptocurrency in down payments. To be considered as an eligible asset for a conventional mortgage loan approval, the digital assets must first be converted into dollars.
Freddie Mac recently issued guidance for cryptocurrency in mortgage approvals. Taking note of “the high level of uncertainty associated with cryptocurrency” in its update, it updated its Seller/Servicer Guide to say:
- Cryptocurrency used in the transaction must be exchanged for U.S. dollars first.
- A borrower’s debt-to-income ratio must account for any monthly payments on debts secured by digital assets.
- Cryptocurrency doesn’t count as “evidence of sufficient remaining assets” to show a buyer’s likely ability to continue loan repayments. This contrasts with retirement distributions, which do count.
- Crypto income doesn’t count when a borrower is qualified for a loan.
The updated Seller/Servicer Guide also indicates that this area of financing is still developing: “We will continue to monitor cryptocurrency developments,” Freddie Mac states, and it may update its requirements accordingly.
Moving the Funds: Nuts and Bolts
Mortgage and insurance firms will back cryptocurrency offers if the digital assets are converted to dollars. Basically, what is going on here?
Cryptocurrency is held in accounts on exchange platforms. The user’s regular bank accounts connect to their crypto wallets through their exchange accounts. As they exchange crypto for dollars, users move funds bank into their bank accounts, paying an exchange fee to do this. Lenders ask for statements showing the conversion into dollars.
Well-known platforms (perhaps the most well-understood one at this time is offered by Coinbase, a publicly traded company) store a complete, running record of holder’s cryptocurrency investments, rewards, sales, and coin-to-coin conversions for documentation.
Buying a Home With Crypto: Complexities
First, the obvious. Cryptocurrencies, particularly bitcoin, may have scarcity value, but they are still rather volatile assets. Buyers and sellers need to anticipate potentially big changes in the agreed-upon payment on the way to the closing table. This is not for the faint of heart.
There is no traditional paper trail. Bitcoin transactions are indelibly etched on the blockchain and can be precisely tracked; yet no transaction has a label connecting it with a named user. This is not what lenders are used to. Many will not accept assets if the underwriter doesn’t believe they can trace the fund to their origins.
Final Notes, and an Important Disclaimer
We do not endorse any cryptocurrency, platform, exchange service, or method of using digital assets in purchases. Our articles are for general knowledge only, and not intended as financial advice. Readers should diligently study the risks associated with crypto assets before investing in or using them.
Please note that cryptocurrency is not the same as money under the tax laws. The Internal Revenue Service categorizes cryptocurrencies as they do stocks — that is, as capital assets. So, expect to pay capital gains taxes if you sell crypto assets at a profit. Assets bought and sold for a profit within one year are taxed as short-term capital gains — at a higher rate than a long-term gains. Because everyone’s tax situation is unique, it’s best to speak with your own financial expert about the wisdom of using crypto in your financial circumstances — and the hit you may take when you sell your digital assets!
Supporting References
Jason Kluge for Mortgage Equity Partners: Cryptocurrency and the Mortgage Industry (Jun. 7, 2021).
Freddie Mac Single-Family Bulletin 2021-36: Updates to Freddie Mac Sellers (Dec. 1, 2021).
Jeff Lazerson of MortgageGrader.com:Lenders Accepting Bitcoin as Down Payment on Home Purchases (published as an Orange County Register opinion column, updated Mar. 26, 2021).
Sidney Richardson for Rocket HQ: How to Buy a House With Cryptocurrency (Jul. 20, 2021).
And as linked.
Photo credit: Alesia Kozik, via Pexels.