Do VA Lenders Accept Bitcoin as a Down Payment on Home Purchases?Updated: April 28, 2022
Most borrowers do not need to make a down payment when using a VA loan to purchase a home. But, in some cases, VA lenders do require a down payment. As such, veterans and service members often ask, do VA lenders accept Bitcoin as a down payment on home purchases? While lenders won’t directly accept Bitcoin, options exist for these borrowers, which we’ll discuss in this article.
Specifically, we’ll discuss the following:
- VA Loan Overview
- Situations When VA Lenders Require a Down Payment
- Bitcoin Overview
- Using Bitcoin for a VA Loan Down Payment
- Tax Implications
- Final Thoughts
VA Loan Overview
The Department of Veterans Affairs administers the VA loan, which offers eligible borrowers these outstanding terms:
- No down payment required
- No private mortgage insurance (PMI) required
- Low interest rates
- Streamlined refinancing option via the Interest Rate Reduction Refinance Loan (IRRRL)
As the above illustrates, the VA loan’s primary benefit is that it doesn’t require a down payment – usually. But, in rare situations, borrowers will need to make a down payment for a VA loan. In these situations, people ask: can I use Bitcoin for my down payment?
Situations When VA Lenders Require a Down Payment
Before discussing whether VA lenders accept Bitcoin for down payments, we need to first outline the two main scenarios when borrowers need to make a down payment:
Down Payment Situation 1: Low Appraisal
During the homebuying process, mortgage lenders will have your home appraised. This appraisal determines the current market value of the home. VA lenders (and all mortgage lenders) will not approve loans for more than a home’s value. Basically, these lenders want to confirm that, if you default on your loan, they can A) foreclose on the property, and B) sell it for enough to pay off the outstanding loan balance.
If your home is worth less than the outstanding loan balance, the foreclosure process will not allow lenders to recoup their funds. As such, VA lenders will not approve a loan for a home’s purchase price if that purchase price exceeds the appraised value. For example, say you agree to buy a home for $300,000, but the appraisal comes back at $275,000. The VA would allow its approved lenders to issue a loan for up to $275,000 – not the full $300,000.
In these situations, borrowers who still want to proceed with a purchase need to pay a down payment. That is, they need to pay in cash the difference between the appraised value and the purchase price. In this example, the borrower would need to make a $25,000 down payment ($300,000 – $275,000), and the VA lender would approve a loan for the remaining $275,000.
Down Payment Situation 2: Borrower Nearing End of Active Service
Before approving a VA loan, lenders will want to confirm that you have enough income to repay that loan. To verify military income, lenders review your Leave and Earnings Statement (LES). This LES also includes your projected date of separation from the military. If your LES shows a separation date within 12 months, you may need to put money down to qualify for a VA loan.
Borrowers with a separation date within 12 months can avoid this down payment requirement if they meet one of these criteria:
- Documentation confirming your re-enlistment
- An accepted civilian job offer
- A signed letter from your CO stating re-enlistment eligibility plus a signed letter stating that you intend to re-enlist
If you don’t meet one of these criteria, the VA requires that lenders get “documentation of other unusually strong positive underwriting factors,” to include a 10% down payment and “significant” cash reserves.
Now that we’ve discussed situations when borrowers need to make down payments with VA loans, we need to address the original question about Bitcoin. To do so, we must first provide some context regarding how VA lenders view Bitcoin. More precisely, we need to discuss this cryptocurrency in the context of the IRS. VA loans – and mortgages, in general – are heavily regulated by the federal government. As a result, lenders look closely at IRS guidance when considering any sorts of assets, particularly newer ones like crypto.
According to the IRS, cryptocurrency like Bitcoin: […] Is a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. However, the term virtual currency is somewhat misleading, as the IRS doesn’t consider Bitcoin as actual currency like US dollars. Rather, it: […] is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency.
Put simply, the IRS considers Bitcoin and other cryptocurrencies to be property – not currency. As a result, lenders will not accept your cryptocurrency holdings directly. Despite this reality, options do exist to use Bitcoin as a down payment on home purchases, which we’ll discuss in the next section.
Using Bitcoin for a VA Loan Down Payment
To use Bitcoin in either of the above VA loan down payment situations, you need to take an additional step with your crypto balance. As stated, VA lenders will not accept cryptocurrency directly to cover down payment requirements. Instead, borrowers will need to liquidate these assets, that is, sell and convert them to cash. Once you make these sales, lenders will then verify that the cash has been deposited into one of your accounts.
For example, say you have $25,000 in Bitcoin that you’d like to use for a down payment. During the underwriting process, your VA lender will verify that you have enough cash on hand to cover this requirement. Consequently, showing the lender the balance in your Bitcoin wallet will not suffice. Instead, you’ll need to A) sell your holdings, and B) deposit the funds into a cash account. Lenders will then verify this cash by reviewing your account statements.
At closing, you will transfer the $25,000 in cash to the VA lender. In this fashion, you can indirectly use Bitcoin as a home purchase down payment. That is, you can convert your crypto holdings into cash and use the cash to pay the down payment.
The Importance of Documentation
Closely related to this cash verification, lenders will demand clear documentation of any Bitcoin assets. More precisely, lenders will require a clear paper trail confirming that you A) own the crypto holdings, and B) have converted them to cash.
Unfortunately, most cryptocurrency wallets don’t provide traditional monthly/quarterly account statements like bank accounts. Rather, you’ll need to confirm what sort of documentation your lender will accept. For instance, some lenders may accept screenshots of your wallet for the past couple months. Ultimately, it’s up to the individual lender, so confirm early in the VA loan application process what sort of documentation they’ll need to cover their Bitcoin-to-cash paper trail requirements.
NOTE: The federal government also mandates that lenders follow strict anti-money laundering requirements. As a result, if you have any large cryptocurrency purchases, plan to document where you received the original funds to make that purchase.
Prior to selling Bitcoin to cover the VA loan down payment on a home purchase, borrowers should also consider the potential tax implications. Due to the fact that the IRS treats cryptocurrency as property, sales are subject to property-related taxes. In other words, if you sell your holdings for more than you purchased them, you will be subject to capital gains taxes. And, depending on how long you held that cryptocurrency, you’ll either pay ordinary income tax rates or the more favorable long-term capital gains rates.
Bottom line, if unsure of the tax implications of a cryptocurrency sale, you should consult with a tax professional. With proper planning and tax strategies, you can at least minimize the tax bill you’ll face for a sale.
Currently, VA lenders do not directly accept Bitcoin to cover a home purchase down payment. But, borrowers can sell their crypto holdings and use the cash to make a down payment. Before taking this step, make sure you consider the potential tax implications, though.
Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.