When you apply for a mortgage, your lender will look at your bank statements very carefully. They aren’t looking at where you spend your money, though, instead, they look at your deposits. They need a paper trail of every deposit so that they know its origination. If you have cash deposits, it could pose a problem with your mortgage application.
Keep reading to learn how to get around this issue.
You Need Proof of the Funds’ Origination
If you have cash to deposit in your checking or savings account, you can do it, but you need proof of its origination. Let’s say for example that you have $1,000 in cash that you received from selling some antiques your grandmother gave you.
You could just go and deposit the money and think nothing of it. But if it is within two months of a mortgage application, the lender will question it. If you don’t have proof of where you got the funds, the lender will not be able to include the $1,000 in your available funds and they may even deny your loan.
On the other hand, if you had a Bill of Sale or receipt to show the lender that you sold the items, it could serve as your proof. The lender will compare the receipt to the deposit amount – make sure the amounts match perfectly in order for the lender to accept this form of proof.
The same method works for any type of cash accumulation, whether you sell stocks, sell a car, get a bonus from work, or get a gift from a family member. You need proof of the receipt of cash.
Gift Funds are a Little Different
If you do receive gift funds from a family member, you have a few more steps to take. The lender needs to know where the funds originated, but also that the donor does not expect you to repay the funds. In other words, the lender needs to know that you don’t have a loan somewhere down the line.
You can prove gift funds with a few documents:
- Gift letter – You need a gift letter from the donor stating that the funds are a gift, the amount of the gift, and the reason for it (purchasing a home). The letter should also state that the funds are a gift and there is no expectation of repayment.
- Proof of the funds – The donor must provide his or her own bank statement showing ownership of the funds. Just like with you, the borrower, the bank statement shouldn’t show any recent large cash deposits. The lender needs to know that the funds the donor provides are his own funds.
- Proof of transfer of the funds – The donor must write you a check, which you must keep a copy of to show the lender. You then deposit the check in your account, taking a deposit receipt as proof of the deposit, again, giving it to your lender.
Make Deposits Earlier Than 2 Months Before You Apply
One last method you can use if you need to make cash deposits in your account is to do so before you apply for the loan. Lenders typically only ask for bank statements from the last two months. If you do not have any large deposits within that time, you should be able to use the funds in there for your down payment and closing costs.
Lenders only look for recent large deposits. If you took out a loan more than two months ago, it would show up on your credit report and the lender would know about it already. It’s the loans that are new that don’t show up right away and could put the lender in a bind if they don’t catch it.
It’s wise to avoid any cash deposits when you want to apply for a mortgage in the near future, but sometimes it is just necessary. As long as you are upfront with your lender and tell them what the funds are from and you can document it, you should be in good shape. It is always wise to be honest with your lender as they can walk you through the program and take the steps necessary to get you approved.