Mortgages and Cryptocurrency
by Alejandra Roca (originally posted on Redfin )
The real estate market has gone through some enormous changes in the past decade, from the tightening of lending standards and the abandonment of most subprime loans to the affordability crisis now plaguing many major cities and metropolitan areas. The houses may have stayed the same, but the way people buy them has changed markedly.
The currency used to make down payments has started to change as well. Just a few years ago, paying for a home with cryptocurrency would have been unthinkable, but today it is possible. And while not all lenders recognize, or even understand, things like Bitcoin, a growing number of mortgage companies are taking these alternative forms of payment very seriously. So should you buy your next home with cryptocurrency? Here are some things to consider.
Pros and Cons of Using Cryptocurrency
While buying a house and making a mortgage down payment with cryptocurrency is technically possible, it is not always a good idea. There are many things to think about when contemplating the use of Bitcoin, Ethereum, Litecoin and the like to pay for the home of your dreams.
For starters, the volatility of the cryptocurrency market should give you pause, even if you currently have the funds to make the transaction happen. How would you feel if the price of Bitcoin plunges a day before the closing, leaving you without the cash you need for the transaction?
Conversely, how would you feel if you sold your Ethereum holdings to make the down payment on your home, only to see the price of the popular cryptocurrency skyrocket? In the end, you could end up regretting the decision, much like the person who used their Bitcoin to buy a couple of pizzas when the coin was worth mere pennies.
Then there is the tax implications of using cryptocurrency. The rules governing the use of cryptocurrencies like Bitcoin, Litecoin and Ethereum are still somewhat vague, and it is easy to make a mistake when reporting profits and losses. If you have been less than scrupulous at reporting your cryptocurrency transactions to the IRS, suddenly using those funds to buy a home or make a down payment could raise the ire of the tax agency, something you definitely do not need.
As you can see, using cryptocurrency to buy a home has some potential downsides, but there are some advantages as well. One of the biggest advantages is diversification – instead of holding the bulk of your assets in volatile
cryptocurrencies, you get to branch out into the real estate market. A home may be a boring asset, but it is generally a stable one.
If you were an early adopter in the Bitcoin, Litecoin or Ethereum revolution, you probably have some big gains accumulated. Taking some of that money off the table is a great way to protect yourself and your finances, while buying a home of your own gives you not only a place to live but an asset you can draw on in the future.
How to Successfully Sell Bitcoin for Your Mortgage Down Payment
The inherent volatility of the cryptocurrency market makes paying for the down payment in those funds impractical. You might feel great if the price of Bitcoin spikes in advance of the closing, but the opposite could happen just as easily.
If you plan to convert your cryptocurrency holdings into real estate, you will first need to sell the Bitcoin, Ethereum, Litecoin or other digital asset. But before you sell, you will need to fully document every part of the process, from the original purchase of the asset to the eventual sale. If you fail to keep a valid paper trail, the bank or broker could refuse your mortgage application.
You will also need to make sure your transaction is conducted in U.S. dollars, and that any profits are reported to the IRS. The taxing of cryptocurrencies like Bitcoin and Ethereum is a complicated matter, and there is still some vagueness to the rules and regulations. If you plan to make any large cryptocurrency transactions, including selling Bitcoin to finance your down payment or qualify for a mortgage, it pays to consult a tax expert first. You do not want to start your real estate market experience with a big tax bill from the IRS.
How to Use Your Cryptocurrency Holdings to Qualify for a Mortgage
The real estate market can be a complicated place, and the process of qualifying for a mortgage can seem arcane at times. In order for any major change to take place, the buy-in of major players like Fannie Mae is required.
The good news for cryptocurrency holders is that Fannie Mae has recently clarified its position on the use of cryptocurrency in the mortgage qualification process. In its response to a leading mortgage broker, Fannie Mae indicated that Bitcoin could be used to secure a mortgage loan, but only if there was a full paper trail in place.
If you plan to use your Bitcoin, Ethereum or Litecoin holdings to secure a mortgage loan, you should first make sure you have all the paperwork to back up your claims and your investment. In order to qualify for a Bitcoin-backed mortgage, you will
need documentation showing the original purchase, as well as documented proof of the sale.
The Future of Cryptocurrency in the Housing Market
After years of record price declines and a real estate market that was hovering on the brink of destruction, things have turned around in a big way. The housing market is strong and getting stronger, with rising prices and high demand. And although there are some affordability concerns, people are still buying houses.
The future of cryptocurrency in the housing market also appears bright. After some stunning reversals and high price volatility, the price of Bitcoin seems to have stabilized somewhat, and that could give mortgage lenders and others greater confidence going forward.
The recent announcement by Fannie Mae that Bitcoin could be used to secure a conventional mortgage loan is also good news for cryptocurrency investors who want to branch out into the real estate market. As long as there is a strong paper trail and records of past transactions, Fannie Mae seems to have no problem with cryptocurrency-enabled home purchases, and that is giving mortgage lenders more visibility and greater confidence.
The fact that a Seattle area cryptocurrency investor recently used those digital assets to qualify for a conventional mortgage also bodes well for the future of these unconventional real estate transactions. That investor used his cryptocurrency holdings to purchase a home valued at more than $400,000, qualifying for a traditional mortgage in the process.
As interest in the cryptocurrency market continues to rise, so should the use of these digital assets to finance down payments and secure mortgages. A growing number of mortgage brokers are considering cryptocurrency holdings in their lending decisions, and many more are expected to follow suit in the coming years.
It should be noted that the financing of a down payment and the securing of a mortgage is still done based on U.S. dollars and not Bitcoin, Ethereum, Litecoin and the like. The $400,000+ home sale outside Seattle may have been made possible by cryptocurrency investments, but the cash used to make the down payment and secure the mortgage was still in U.S. dollars. So if you have considerable cryptocurrency holdings, it might make sense to diversify your assets with the purchase of a home. Making a real estate investment makes sense, and the transaction could significantly reduce your risk in a still volatile cryptocurrency marketplace.