Cash Deposits are a Hidden Danger for Mortgage Applications
The year is ending and the holidays are in full swing. Many people have taken advantage of historically low mortgage rates and are in the middle of buying a house. For those that are in the middle of the home buying process, few things would be a better holiday present than closing on their dream home. Conversely, few things would be a bigger lump of coal in the stocking than having your mortgage application jeopardized at the last minute. Don’t let your lender be a grinch and take away your chance of a new home at the last minute. One of the biggest hidden dangers for those in the middle of applying for a mortgage is making large cash deposits. The team at Peoples Choice Mortgage is here to explain why a large influx of cash during the holidays isn’t necessarily good for your mortgage application.
How Large is Too Large of a Cash Deposit?
Before we get into why a large cash deposit can jeopardize your mortgage applications, let’s discuss how large is too large. A large cash deposit means anything that is out of normal based on your typical cash flow and deposit patterns. If you suddenly come into an amount of cash that is larger than your typical regular deposits, you should wait until after your mortgage is approved. Otherwise, you might have to provide documentation to prove the source of your cash influx.
Typically, lenders ask for two months worth of bank statements to underwrite your loan. Any large influxes of cash that occur during this time can cause loan underwriters to look at your application a little closer. Loan underwriters are not worried about large sums of cash that were deposited prior to this two month period. Any money that has been in your account for more than 60-days is considered “seasoned” and will not raise red flags for your application.
There are many different types of deposits that you should be wary of. If you just sold a car, boat or other large item then you should proceed with caution. You should also think twice if you received a large cash gift from your family. Unreported income from under-the-table pay or from unreported tips could also cause problems. Money donations from a fundraiser that was done on your behalf can also increase scrutiny of your finances for your mortgage application.
Why Can Cash Deposits Jeopardize Mortgage Applications?
Normally getting a large amount of cash is something to celebrate. So, it seems counter intuitive why a large cash deposit might complicate your current application. However, cash deposits make life difficult for underwriters who have to evaluate your income and your ability to repay your loan. Loan underwriters are subject to a number of regulations that limit how they evaluate your loan. A sudden increase in your bank account can raise red flags for a number of reasons.
Income Verification: First, it is the loan underwriter’s job to verify your sources of income. If you suddenly deposit a large sum into your account then it begs the question of whether or not you reported all income streams.
New Loans or Lines of Credit: Second, a sudden increase in your bank account might cause them to wonder if you received a new loan or line of credit. Evaluating whether or not you can pay your mortgage payment means taking into account all of your debts. If you take out a new loan or open up a new line of credit during your application then the underwriting process has to start over.
Down Payment Gifts: Third, they need to verify if your deposit came from a down payment gift. Some loan types do not allow applications to get down payment gifts.
Illegal Income Sources: Finally, they need to make sure that your deposit came from legal means as to not run afoul of federal money laundering laws.
What Should You Do if You Have to Make a Large Deposit?
If you do come into a large sum of cash and do not feel comfortable holding onto it, then you need to ensure it doesn’t harm your application. Again, loan underwriters are looking to make sure that any deposits do not impact their underwriting formula or that they aren’t against regulations. As long as your influx of cash is from legitimate means, then all you need to do is provide documentation for the source.
If you sell a large item then you need a receipt for the transaction. You also need some type of appraisal that can verify the value of the item. You do not need to have it actually appraised. Instead, you can submit a Blue Book price that estimates the value of the item you have sold.
The most difficult type of cash deposit to justify is piggybank money. Some people save money over the years at their home. This can sometimes be referred to as piggybank funds or mattress money. If you have a large chunk of at-home savings you should probably avoid depositing it into your bank. Chances are that you have been accumulating this money over a long period of time and that you do not have proof of the source of it. This makes it very difficult for underwriters to prove it is not from an additional income stream or that it was earned legally.
Final Thoughts
Getting a bunch of extra cash is a blessing. However, loan underwriters do not necessarily see it that way. To them, it is something that changes the financial picture of a loan applicant that they already developed. If you have questions on how you should approach a cash influx, contact your mortgage broker. Our job is to help you through every part of the loan application. We can talk you through what kinds of documentation you need in order to explain to an underwriter why your account balance suddenly increased.
For everyone that is closing out this year by waiting on an approval letter, we wish you the best of luck! Owning your own home is truly the gift that keeps on giving. If you would like to see if you can end the year by owning a home of your own, contact us! The team at Peoples Choice Mortgage would love to help you see if you qualify for today’s low mortgage rates.
