Do buyers have to tell you the source of their down payment?

Following up on our last post about "Debunking industry myths and fairy tales", here is another myth busted by Washington REALTOR News. Myth Number 6 is shown below in its entirety, and is reprinted with permission from Washington REALTORS(r). This article is not legal advice. You should always consult your own real estate attorney, REALTOR or tax specialist.

Myth Number 6: Buyer has no obligation to disclose the source down payment

There is a version of this myth that is true. But, the extension of this myth to all buyers leads many buyers to commit an act of fraudulent inducement.


If buyer has sufficient cash or liquid resources to pay the down payment and all required closing costs, then absent a request from seller, buyer has no obligation to reveal the source of the down payment. But, if buyer is relying on gift funds, the sale of a house, car or boat, the extension of a line of credit, the refinance of unrelated property or any other source of contingent funds, buyer must disclose this fact to seller, as part of the purchase agreement. Failure to do so results in buyer fraudulently inducing seller to enter the purchase agreement [emphasis ours].

Paragraph (a) of the statewide purchase agreement (form 21) includes a statement indicating that buyer is not relying on any contingent source of funds, unless otherwise noted in the purchase agreement. When buyer attaches a 22A financing contingency, buyer notes the fact that buyer is relying on a contingent source of funds for the purchase of the property, with the exception of the amount of down payment specified in the first paragraph of form 22A and buyer’s closing costs. If buyer is also relying on a contingent source of funds for the down payment and/or payment of closing costs, then buyer must separately note that in the purchase agreement. Buyer does not have to make receipt of the contingent funds a separate contingency of the agreement. If buyer does not receive the contingent funds for the down payment or closing costs, buyer will not obtain financing and will be protected by buyer’s financing contingency, so long as buyer disclosed that the down payment and closing costs were from a contingent source. However, if buyer does not disclose that the down payment or closing costs are dependent upon the occurrence of some contingency, then if those funds fail to materialize, buyer will not be able to rely on buyer’s financing contingency because buyer will have fraudulently induced seller to enter the agreement by initially representing, in paragraph (a) of form 21, that buyer was not relying on a contingent source of funds.

As a side note, because of the unreliability of some lenders and loan programs in today’s market place, many sellers are now demanding that buyers provide documentation proving the cash resources that buyer represents to possess. This requirement is issued prior to seller accepting buyer’s offer.