When you apply for a mortgage, lenders look at all aspects of your financial life, including the deposits you make in your bank account. Why would lenders care about your deposits? Money is money, right?
Unfortunately, that’s not the case. Lenders care about every penny you put into your bank account in the months leading up to your mortgage application and mortgage closing. Lenders accept deposits made that coincide with your income; it’s the cash deposits that concern them. Cash deposits could signify that you borrowed money from someone or you are using the funds to ‘stack’ your account to make you look eligible for a loan program.
Here’s the problem, though. If you borrow money from someone you have to repay it. This affects your debt-to-income ratio. In other words, it may be harder for you to afford the mortgage payments because you aren’t giving a true indication of your financial liabilities.
If you have cash deposits that are legitimate and aren’t a loan, use the steps below to ensure your lender will accept them.
Keep Careful Track
You must prove the origination of the cash deposits. Because it’s impossible for lenders to track cash deposits, they’ll ask you where you got the money. Just telling them isn’t enough, though. You must have a paper trail.
For example, if you sold your old car and made a few thousand dollars, you’d have the Bill of Sale to show your lender. As long as the cash deposit matches the Bill of Sale to the penny, the lender may accept it as enough proof. On the other hand, if you had a garage sale and made $1,000 and you tell the lender that you sold ‘a bunch of stuff,’ it won’t work. Lenders need concrete proof of where the money came from to ensure it’s not a loan.
Keep a Copy of Deposited Checks
If you received a check for something, such as a tax refund, bonus at work, or you provided a service to someone that wrote you a check, keep a copy of the check. Your lender may ask for further clarification on why you received the payment, but having a copy of the check is the start. Official tax refunds and work bonuses are easy to track, but other sources of income may need further clarification. Stay in close contact with your loan officer and provide the necessary documentation.
Get Proof of Gift Funds
Many loan programs do allow you to receive gift funds. You can use these funds to help with your down payment and closing costs. But, there’s a strict format you must follow in order for lenders to accept the gift funds.
The donor must provide the funds in a check, not cash. The donor must also write a gift letter that states the amount of money he/she is gifting, the reason for the gift, your relationship, and a statement that this is a gift and not a loan. Lenders may also need to see the source of the funds on the donor’s end, just to make sure there isn’t a loan or credit card cash advance somewhere down the line.
What Amount Matters?
Keep in mind, lenders don’t question every cash deposit you make. They use their best judgment when deciding. If the deposit is much larger than your regular paycheck for example, that’s a red flag. Any deposit over a few hundred dollars may face more scrutiny. It’s best to be prepared with explanations and proof of any sizeable deposit just in case.
Explaining cash deposits doesn’t mean you won’t get loan approval. You will have to jump through a few more hoops and it could delay your loan processing, but in the end, if you have the proper documentation, it shouldn’t affect your loan approval.
If you are worried about a specific deposit, wait two months to apply for a mortgage. Lenders consider your deposits seasoned after two months. This gives the credit bureaus plenty of time to report any loans on your credit report, which would alert lenders of your required payments which they would figure into your debt ratio.