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NO CASH WHEN APPLYING FOR A MORTGAGE
Unfortunately, cash is NOT KING when it comes to the mortgage and real estate industry. All $$$$ MUST be sourced. What does “sourced” mean? It means YOU must PROVE to the lender where all $ comes from.
Loan officers and mortgage processors need to make sure thatthe borrower has enough cash to close and seasoned funds for closing in theearlier stages of the mortgage process. While that might seem unfair, mortgage lenders have to operate by certain procedures that are designed to protect the integrity of the mortgage loans that they make.
The problem with cash is that there is no solid way to track where it comes from. And because of certain requirements within the mortgage industry, cash doesn’t fit neatly within the guidelines.
- Banks and lenders want to ensure the money is truly the borrower’s money, and in the borrower’s account for several months before they’ll accept those assets as their own. If it just appears out of thin air one day, the lender won’t feel very comfortable about the legitimacy of those funds.
- The Money Could be from Illegal Sources: Technically speaking mortgage lenders are not in the business of investigating illegal sources of cash. However, they are on the lookout to not accept money from such sources. And unfortunately, physical cash does have the potential to be the result of illegal activity.
- The USA Patriot Act was passed after the 9/11 attacks, and all financial institutions are required to observe it. The law specifically requires all appropriate elements of the financial services industry to report potential money laundering. That includes the use of physical cash in the purchase of major assets, such as real estate. The law effectively prohibits lenders from accepting physical cash as a source of funds for down payments beyond a very minimal level.
Q. What if I have a friend or relative that wants to give me a gift to use towards my down payment?
A. No problem, the donor needs to sign a gift letterprovided by the lender which states that the funds gifted to the home buyers isa gift and not a loan and that the gift funds will not be paid back to thedonor. The borrower needs to make a copy of the check received by the donor andprovide copies of the deposit slip as well as an updated bank statement afterthe deposit of the check from the donor of the gift funds. The donor needs toprovide 30 days of bank statements showing that the gift funds have beenseasoned for at least 30 days. It needs to show gifted funds being withdrawnfrom their account and deposited to the home buyer’s bank account.
Gift Funds can be used for down payment and closing costs.Gift Funds cannot be used for reserves. Reserves needs to be borrowers own funds.
Q. Can I use borrowed money for a down payment?
A. No, another reason physical cash cannot be used is because it cannot be traced. That holds open the possibility that the moneycould be borrowed. For example, you can get a cash loan from a friend, and tell the lender that it’s your money.
One of the situations lenders are always on the lookout for is what are known as sleeping seconds. This is when borrowed money is presentedas the buyer’s funds at the time of loan application. But after the closing, a new lien is recorded on the property in the form of a second mortgage. When that happens, the lender is suddenly faced with the prospect of having made ahigher risk loan than originally anticipated.
Q. What do I do if I sold a car?
A. Provide receipt of sale and bank statement showing deposit
Q. I have been saving $ under my bed mattress
A. Yikes! Ask your lender. Most times if you deposited the cash, and waited to apply 60-90 days out you should be ok. Typically lenders will request 2 months of bank statements.
There are still folks who do not trust banks and have cash in safe deposit box at their local bank or cash on hand in their homes. Unfortunately, cash cannot be used as verified sourced funds. The only solution is to make the cash deposit in your bank account and wait 60+ days for the funds to seasoned in order for those funds to be counted as verified funds.
Q. I had a garage sale and have cash
A. If it is a significant amount, same applies as above. Another option, would be to use that cash to live on i.e groceries, gas etc.
Q. I have a gift but they don’t want to show their bank statement
A. Ask your lender, but in most cases, the funds MUST be sourced or will not be able to be used.
Q. Is a $1,000 direct deposit every other week from my employeracceptable?
A. YES! this will be considered verified funds, these fundscan be used for cash to close and seasoned funds for closing. However, if youwere to deposit cash from your side job, those funds cannot be used for cash to close and seasoned funds for closing.
Q. What if I take cash to the bank and get a cashier’s check?
A. Hypothetically, let’s say it was $2000. Did you have a seasoned $2000 already sitting in your account? If not, no this cash cannot be used. If yes, it’s possible. Just because you turned it into a cashier’s check, it WAS cash, and the lender still needs to know where that cash came from.
Q. What are irregular deposits?
A. Any irregular deposits that is over $100 dollars needs to be explained and the source of the deposit needs to be provided to the mortgage underwriter
Q. I have a tax refund, can I use that for my down payment?
A. YES! Because THIS $ can be sourced, you can show where it came from! The documentation from the IRS and deposit slip.
Q. How long do funds need to be sourced?
A. Ask your lender, but typically 60 days. Lenders require 60 days of bank statements and only the transactions from the 60 days of their bank statements are scrutinized. Anything prior to the 60 days are not questioned and are considered verified sourced funds and can be used for cash to close and seasoned funds for closing
Q. What are Large Deposits?
A. Under the view of lenders, large deposits are deposits that are equal or greater than 10% of the monthly gross household income of the borrower. Large deposits need to be sourced to be able to be used for cash to close and seasoned funds for closing
Q. I have been saving cash for years and want to use that as a down payment to purchase my own home, what do I do?
A. Make sure you have your down payment money sitting quietly in a bank account for at least 60+ days before applying for a mortgage.
Just because you have the money in your account doesn’t necessarily mean you’re good to go. If you want to look better on paper prior to applying for a home loan, you might think it wise to transfer $10,000 into your checking or savings account. That way you’ll have the amount necessary to cover down payment, closing costs, and reserves. It’s not that easy, the underwriter is going to see at least your last two bank statements and that deposit and start asking questions if it looks unusual. By unusual, any large deposit relative to your overall balance or savings history. If you only had $1,500 in thataccount, then all of a sudden dumped $10,000 into it, it will be scrutinized.
Even moving money from one verifiable account to another can raise new red flags if the underwriter sees stuff they don’t like in either account. Put simply, the more accounts that are involved, the more documentation requests, and the greater potential for trouble. In a perfect world, hopefully you have all the money you need in a savings account that hashad very little to no activity in the past 2-3 months. That way no questions will be asked, hopefully!
Q. Can I use funds from a joint account?
A. Generally you can use money from a joint account for reserves and down payment, but you’ll typically need to provide a letter from the other account holder(s) explaining that you have full access to the funds.
Some useful tips regarding using assets for a mortgage:
- Season assets two months before you apply for a mortgage!
- It’s important to have your assets in a verified account
- Try to limit any activity (deposits, withdrawals, purchases, transfers) in said account(s) for the preceding monthsleading up to the mortgage application to avoid any unnecessary conditions or letters of explanation.
- If you plan on using business accounts for assets, you’ll likely need to be the 100% owner. Although if you own only 50%, some lenders will accept a CPA letter stating what percentage the borrower has access to, and that the use of those funds won’t affect the business negatively.
Allowable types of assets:
- Earnest money deposit
- Checking/savings/CD/money market accounts
- Verification of Deposit (VOD)
- Business accounts
- Mutual funds
- IRA/401k and other retirement accounts
- Gift Funds/Gift of Equity
- Sale of assets
Ineligible types of assets:
- Cash on hand
- Undocumented funds (mattress money)
- Sweat equity
- Unsecured borrower funds
- Illegally obtained funds
- Cash proceeds from a cash out refinance
- Lender contributions
- Seller contributions
- Funds that haven’t been vested
- Stock held in an unlisted company
Recognize We Are On Your Side
While it can sometimes seem that the documentation requests are on the intrusive side, it’s important to understand that mortgage loans are legally created arrangements. And they also have substantial documentation requirements by the agencies and investors who ultimately fund your loan. Your full cooperation will make the whole process go quicker.
It’s also important to understand this limitation when the requests for information and documentation are coming through. The mortgage personnel who are contacting you for documentation aren’t doing it to make yourlife miserable. They’re trying to get your loan approved, but need help getting it done. After all, no one knows your situation better than you do!
By providing the necessary documentation, and doing it as quickly as possible, you are helping your cause. Every piece of information that you supply moves your approval and closing day ahead. Think of it that way – and be proactive – anytime the phone rings or an email arrives with yet another request for more documentation.
If you are able to buy a home cash, DO IT, you will save $ in the long run, AND you do not have to go through so much red tape!
- Provide requested documentation as quickly as possible
- Return applicable signed disclosures as quickly as possible
- Be prepared to provide additional documentation if requested during the process
- *SAVE $
- *PAY ALL DEBTS ON TIME
- Apply for any new debt such as credit cards, automobiles (not including secured credit card listed above)
- Co-sign on another loan
- Allow multiple lenders to run hard credit inquiries, as this has the potential to damage your credit score
- Move money around and between accounts
- Change jobs
- Wait to the last minute to select your homeowners insurance agent
As a home buyer, you’re on your way to being better prepared for getting a mortgage and buying your first or next home. Don’t take chances. Do your research and ask lots of questions. When you work with a team of your agent, lender, insurance agent, title, home inspector with solid understanding of real estate processes, your chance of success is greater. Feel free to contact me for my recommendations or for a free consultation. My goal is to provide you with information that will help you in your decision making process.
If you want to jump ahead – go to my blog and start reading. 🙂
Closing Costs: https://ddesousa.com/closing-costs-what-are-they/
Credit & Buying a Home: https://ddesousa.com/credit-and-buying-a-home/
First Time Home Buyers: How to Purchase Part 1: https://ddesousa.com/part-1-first-time-home-buyers-florida/
Pet Friendly Lender / Free Pet Adoptions: https://ddesousa.com/why-pet-friendly-lender/