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We are considering placing a chunk of our savings into a long-term CD with a very low early-withdrawal penalty. After looking at a number of different scenarios, we have decided this is the best option for us, even though we know we will not be keeping the CD through its term, because...

... in a few years we will be looking to buy a new home. We are currently homeowners and will be looking to upgrade.

I am curious how our mortgage lender will feel about these CDs - are they considered as good as cash or will we need to get the money out of the CD before we apply? If the latter is the case, will we need to do that a certain period of time before our application?

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    You are currently homeowners. Are you going to need a larger mortgage? In a similar situation, instead of a 1-2% CD, I just prepaid my 7% mortgage. When you sell the house, you have more equity for the next one. – JTP - Apologise to Monica Jul 20 '13 at 16:24
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Short answer: the CD can be considered as part of the down payment calculations. they will want a plan to cash them in the last days or weeks before settlement.

When approving you for a mortgage they will be looking at:

  • Income : Generally salary or from a guaranteed stream like a pension or social security. Commission based income is a special case. But generally not investment income.
  • Expenses that you are committed to: Car Loans, school loans, other loans.
  • Credit Card balances.
  • Do you have other real estate that you will not be selling before completing this transaction. They will count taxes and Home Owner Association (HOA) fees as an expense. This could have a mortgage. If it has a renter this would be both income and expense.
  • Other real estate that you will be selling prior to this transaction.
  • Credit Score.

They now know what you can afford to dedicate to this new property every month. They take into account principal, interest, taxes, insurance and the HOA fee.

They will then look at how much money you will use as a down payment. They want this money to exist before applying, and they will check on its existence in the last days before settlement.

The best is cash sitting in a bank. But it can also be money in savings bonds, or a CD, but they will want a plan for cashing that in just before settlement.

They won't be comfortable with it being in a volatile account such as stocks especially if the current balance is exactly what you need for a mortgage that won't be closed for 3 more months. Because people use money they borrow from their 401K for a home purchase, it is possible to use money from volatile account. They will want to see a plan for getting money from these accounts just before settlement.

  • Fantastic answer - and reaffirms our decision that CDs are the way to go instead of trying for a higher rate of return with stocks. – JHFB Jul 22 '13 at 11:54

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