Home-buying tip: Don’t open new accounts for your down payment savings

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As a first-time homebuyer, there are a lot of dos and don’ts to the process, and it can be a lot to keep up with. I knew not to open a new credit card or change jobs before applying. But I didn’t know that moving my savings around before my home purchase would cause a headache. 

While it’s not a hard-and-fast rule, moving your savings before your home purchase can add extra steps.

I have a habit of moving my savings around to chase the highest interest rate or try out a new account feature. I have savings accounts at three separate banks, and when I found out I could increase my interest rate from 0.4% APY to 1% APY in a different high-yield savings account, I figured moving my down payment savings wouldn’t hurt.

Getting a mortgage requires your lender to trace every dollar of your down payment

I’d just completed my mortgage pre-approval and wasn’t yet looking at homes. I knew it’d still be several months before my purchase, so I didn’t really think anything of moving the money. By my logic, the money was still mine, just in a different place. 

That wasn’t the bank’s logic. I didn’t realize until I got further into the mortgage approval and underwriting process how much extra work this would make for me. Applying for a mortgage is very different from applying for student loans or car loans, which I had ample experience with. For a mortgage, lenders have to trace and account for every dollar you plan to use for your down payment. 

Because I had been using lots of accounts, I had to to provide statements from several banks. And the deposits in them and between them also needed to be sourced, requiring more documentation. The whole process would have been much simpler if I’d just had one account, and kept the money there. 

Moving money is OK as long as you’re open to doing more work 

Mortgage adviser Nicole Rueth of Fairway Independent Mortgage in Denver, Colorado says moving your savings around is not necessarily a mistake, but it can create more work on the buyer’s end. Each account needs to be traced with at least two months’ worth of history, and any transferred money needs to be traced back to the account where it came from. Moving money just means that you have more loose ends to tie up in collecting your documentation.

It wasn’t the end of my mortgage process, and it didn’t prevent me from getting the loan I needed. But it did make more work, and if I’d known, I wouldn’t have done it. Getting a mortgage can be stressful in and of itself, and this extra step wasn’t worth the 0.6% more I earned in interest.

There wasn’t anything wrong with the high-yield savings account I opened — it’s always fine to use a high yield savings account for your homebuying process, and in fact, you should use a high-yield savings account. For me, it was the timing that caused problems. Opening one while you’re still in the saving stage of your homebuying process is the best move. 

Save yourself some extra work and leave your money alone once you’re pre-approved. If nothing else, it will simplify an already complicated process.

Editor’s note: This post has been updated to clarify that a high-yield savings account is a good place to save money for a down payment. However, it should be opened before pre-approval, not after.