Bitcoin is volatile. It can change in value from one month (or day) to the next.
To a mortgage lender, bitcoin is a non-cash asset. It must be sold before the deal can go through. In other words, holding digital currency is like holding a Patek Philippe gold watch. Or a retirement fund. The holder must turn the value into cash before turning it into a home.
After conversion, a large deposit shows up in the holder’s bank account. Lenders scrutinize unusual deposits. So a mortgage applicant should season those converted funds ahead of the time they’ll be needed — at least two months in advance, most lenders say.
NAR’s Advice to Agents Working With Digital Currencies
The National Association of Realtors® says agents rarely meet buyers who want to use digital currency to buy homes (outside of say, Miami). Yet the buyers “could become more widespread in the future.”
And so, given potential risks to home buyers and sellers alike, NAR urges agents to get up to speed on digital currencies. Here’s what NAR urges agents to consider.
First, know the basics. Bitcoin and cryptocurrencies enable people to pay each other without a bank in the middle. Transfer validations are indelibly recorded on a ledger known as blockchain. According to Coinbase, 20% of the U.S. population holds digital currencies as of 2023. Coinbase says the number of people holding digital currencies has remained stable, year-over-year, despite all the recent turbulence involving digital assets.
NAR agrees. Matt Troiani, NAR’s director of legal affairs, has noted the “recent volatility in the value of cryptocurrencies, the public failure of many crypto firms, and the decade-old predictions of imminent collapse” but nevertheless concludes that “cryptocurrencies appear to be here to stay.”
Of course, blockchain isn’t the only potential game-changer. In recent months, we’ve seen a convergence, with artificial intelligence (AI) and blockchain both impacting the “future of real estate” conversation.
☛ See more at AI and Blockchain: Their Blended Impact in Real Estate.
When Digital Purchases Mean Special Contracts
Are boilerplate sales contracts appropriate for cryptocurrency holders’ purchases? Seasoning converted funds long enough should make the question unnecessary. But what if the buyer still holds the funds as cryptocurrency when making a formal offer?
Crypto values generally fluctutate more than official currency. So what seems like a good deal to a seller when the contract is signed could look different if the digital assets plunge in value by closing day.
What should an agent recommend, according to NAR? The agent could prepare the contract in a way that:
- Has buyers show proof of cash as a backup.
- Prepares the buyer to make a relatively large down payment.
Of course, agents must check the rules issued by the loan backer where a mortgage is involved.
What Digital Purchases Mean for Mortgages
According to Fannie Mae, “Virtual currency may not be used for the deposit on the sales contract (earnest money) for the purchase of the subject property.”
Bitcoin or cryptocurrency may not constitute the down payment or the closing costs. Cryptocurrency will not even count as the buyer’s required reserve funds!
Before a mortgage closing can take place, a loan applicant must prove that they have all those funds in cold, hard cash. Mortgage borrowers must:
- Show the mortgage broker that the digital currency has been exchanged into dollars.
- Show that a regulated financial institution holds the dollars.
- Enable a verification that the funds exist as dollars.
The lender needs to verify the source of all funds that count toward a mortgage approval. Therefore, the mortgage representative will trace the movement of funds — from a digital account, through the exchange process, and into the regulated institution. Buyer, prepare.
NAR’s Advice in a Nutshell
NAR says: Ask the home buyer to season the funds by convert digital currency into dollars and deposit the funds with a regulated bank or credit union well before making a formal offer. The assumption here is that volatility could make it impossible for the seller to know what a cryptocurrency’s value would become by closing time. Attorney Troiani also urges agents to help clients find title professionals who have experience working with digital currency transactions.
While this article is not financial advice, we hope it helps orient readers to the issues as the digital finance world continues to develop.
Supporting References
Melissa Dittmann Tracey for the National Association of Realtors® via REALTOR® Magazine: How to Protect Your Clients in a Crypto Transaction (Aug. 14, 2023)
Coinbase.com: New Survey of 2,000+ American Adults Suggests 20% Own Crypto and the Vast Majority See an Urgent Need to Update the Financial System (Feb. 27, 2023; citing a February 2023 national survey run by Morning Consult for Coinbase).
Fannie Mae via FannieMae.com: Selling Guide (Aug. 2, 2023).
And as linked.
More on topics: Bitcoin, Blockchain for real estate
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