The equity statement
As a prospective property owner, you will certainly want to contribute your own capital to the construction or purchase of your new property. The higher the percentage of equity in the financing, the better the terms will be on the construction loan.
From the banks' point of view, equity represents a lower risk – so banks welcome the contribution of future property owners' own assets. For you, this means less debt financing, i.e. a lower loan amount.
For this loan, you then usually get even better terms, such as lower interest rates and better opportunities for unscheduled repayments.
So in this respect, it pays to spend your own assets on your own property. Banks then require proof of equity. So you need to show the bank that you can actually put your own funds into building or buying real estate. Without such proof of equity, the negotiated loan will not be disbursed by the bank. Basically a simple topic – but one where there is always confusion.
How not to prove your equity
Real estate financing is a difficult subject for many, and a very complex one at that. This is where some people get simple and sometimes bizarre ideas about how to provide proof of equity – especially if all or part of the equity is in the form of cash assets. Photographing cash and scanning the pictures or bills is one such idea. Such an approach is not only legally difficult, but it certainly does not constitute sufficient proof of equity.
Banks are then even more likely to feel that the borrower may not have the stated assets after all. Also, proof of a safe deposit box is not sufficient. Larger sums of cash are sometimes stored in a safe deposit box, but the fact that such a box exists says nothing about its contents. The bank can therefore not know for sure whether the borrower has any assets at all. Even showing the cash personally to the clerk is not sufficient proof.
Statements are the only reasonable proof
Photos, scans and safe deposit box documents are therefore not suitable to provide proof of equity capital. You bring with such proofs the bank only not to disburse the loan. Thereby, a correct and conclusive proof of equity is very easy to provide.
For proof of equity, a bank account or deposit statement is the right choice. Also digital account or deposit statements or printouts of these are quite sufficient. The assets you want to put in must, of course, be in an account or bank deposit for this purpose. So if you have cash, deposit it into a bank account. In this case, a deposit slip is also sufficient proof.
Do I have to use all savings?
In the field of equity and real estate financing persistent rumors persist. One thing is the ratio of 20 percent, which should be the equity in the total amount. This is especially not the case in this day and age. Although a ratio of 20 percent is a very good solution for many banks, you can also finance the property with less or more equity capital. The bank and you can negotiate freely here and contractually fix what is the best solution for both of you.
A second rumor is that banks pressure borrowers to use all savings as equity in real estate financing. This is also wrong. How much of your existing assets you want to put in is, of course, your own business. In fact, many banks welcome it if you do not put the entire savings in the property, but still retain collateral. So you also do not have to hide cash from the bank or the like.
The construction or purchase of a property brings a lot of issues with which the future property owners must deal with. Among them is also a lot of paperwork. The equity proof belongs there in the reason still to the easier undertakings – nevertheless some ambiguities exist here.
Keep it simple: bank account or custody account statements are exactly the proof of equity you need and pass on to the bank. Thus, the proof of equity does not stand in the way when the real estate loan is to be disbursed.