One of the aspirations of cryptocurrency is that it would help democratize the financial world, cutting out middle men like banks and central banks and potentially supplanting fiat currency altogether.
But a dozen years after bitcoin was introduced, some crypto investors are having a hard time using their increasingly valuable digital coins to buy a house.
“If you can’t document or it’s suspicious documentation, that can take you down a rabbit hole,” Pava Leyrer, chief operating officer of Northern Mortgage, told Yahoo Money.
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Mortgage bankers must report any deposit that appears too large or odd. Crypto investments can easily fall into those categories, creating the need for further verification.
Theoretically, this shouldn't be an issue when considering that a fundamental innovation of cryptocurrency is the blockchain, an online digital ledger that is used to record a series of verified public cryptocurrency transactions.
However, when Leyrer tried to close a mortgage last year using a borrower’s crypto gains for the down payment, she couldn’t establish a good paper trail to show where the money originated.
“Our biggest problem was anything they sent us, there was no traceability," said Leyrer, who noted she’s not well-versed in cryptocurrency. "We didn’t know where it came from and whose money it was, frankly. The statements looked weird to us. It was like the money magically appeared."
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And in Leyrer's example, the lack of identification on the cryptocurrency account was actually an issue because there was no way to directly connect the person to where the cryptocurrency came from.
“It was just a bunch of numbers and digits,” she said, noting that the homebuyer ultimately closed on the purchase without using the cryptocurrency gains.
‘Additional complexities associated with ensuring compliance’
A small but rising number of home sellers are open to selling their brick-and-mortar for bitcoin, litecoin, or ethereum.
But mortgage lenders can require more hurdles to clear in those cases, if they allow transactions involving cryptocurrency at all.
John Stearns, a senior mortgage originator with American Fidelity Mortgage, experienced this firsthand last month when closing a home purchase in Florida for $502,000. The borrower had a deposit of $4,800 in his bank account earmarked for closing costs and the down payment.
The borrower sent a Coinbase statement showing that he sold bitcoin, litecoin, and ethereum for U.S. dollars.
“This was a perfectly normal statement," Stearns said. "It had his name on it and showed the money going into his bank account. But the underwriter would not count that money. It caught him by surprise, it caught me by surprise.”
Stearns later found out from the mortgage underwriter that the particular lender, Wells Fargo (WFC), does not accept any funds derived from cryptocurrency holdings. (His underwriter noted that other lenders had similar policies.)
A Wells Fargo representative told Yahoo Money that the bank will only accept funds from liquidated cryptocurrency investments for a down payment and closing costs on loans it makes directly to borrowers, as long as appropriate supporting documentation is provided.
“We do not purchase loans originated by other lenders through our correspondent channel if such funds were used for the down payment or closing costs, due to additional complexities associated with ensuring compliance with our validation and documentation requirements,” Tom Goyda, a company spokesman, wrote in an email to Yahoo Money.
‘Another asset source converted into dollars’
Terrance Leonard, 32, closed on a house in Washington, D.C., in February after using cashed-out crypto gains for his down payment and closing costs.
But the process wasn't easy.
“I was surprised that it was more of a hassle than anything,” Leonard told Yahoo Money. “Cash is cash. Why does it matter where it came from?”
To close on his house, Leonard provided copies of emails confirming the withdrawals from his Coinbase account to his bank account. He had to liquidate twice — once to provide the earnest money to go into contract and then again to fund the down payment and closing costs. Both times, his cryptocurrency investments were on a downswing, so Leonard knew he was sacrificing potential future gains.
“If it was just a pure financial investment, I shouldn’t have liquidated at the time,” the software engineer said. But the colonial house — with its garage for his projects and yard for his dog — fit into his larger life plan, so “I’d rather have this house — I had enough profits at the time.”
Leonard’s lender, Veterans United, did not turn away the funds and may even accept more of these types of transactions in the future.
“Anecdotally, we’re seeing more veterans asking about this: ‘Can I use crypto for my home purchase?’” Chris Birk, Veterans United’s vice president of mortgage insight, told Yahoo Money. “At the end of the day, it’s another asset source converted into dollars.”