Usually when a sizable amount of money is deposited into one of your accounts, it’s time to celebrate — except while you’re waiting for a mortgage loan approval. Under this circ*mstance, those additional funds can lead the loan underwriter to deny your mortgage loan unless you prove the deposit is legitimate.
But, don’t worry. We’ll reveal what constitutes a “large deposit,” when this amount won’t be questioned and when it will, how you can substantiate the deposit’s validity, and why you should let your lender know if you’re expecting one of these windfalls.
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What is a large deposit?
A “large deposit” is any out-of-the-norm amount of money deposited into your checking, savings, or other asset accounts.
An asset account is any place where you have funds available to you, including CDs, money market, retirement, and brokerage accounts.
Depending on the source of these large deposits, they may or may not concern your lender. For example, income from your regular employer like your salary or an IRS tax refund won’t draw any attention because the reference for these deposits will be clearly shown on your bank statement. There’s no question about their legitimacy.
But, if someone repays you for a personal loan or you sell your car and deposit that amount in your checking account, your lender will likely ask you to provide proof of who gave you the money.
Why do lenders care what I deposit into my own account?
A loan underwriter’s job is to confirm that you qualify for the loan by evaluating your credit history, your ability to repay the loan, and the value of the home compared to the loan amount. They also make sure that your loan application follows the “rules” for the specific loan type you’re applying for.
An unexplained deposit can threaten your loan qualification, especially if you can’t establish where those funds originated. Bottom line: Wherever the large deposit came from, you’ll need to prove the source.
Some common reasons why an underwriter may flag a large bank deposit include to confirm:
- You didn’t take out a new loan or debt. Those new loan payments must be included in your loan application, and you’ll need to qualify for the loan with the new debt payment incorporated into your debt-to-income ratio.
- You have additional income. All income needs to be accounted for when applying for a loan even if it’s from a side gig.
- You acquired the funds from an acceptable source. The money can’t come from someone who will benefit from the transaction like the home seller or real estate agent.
- You received the money as a down payment gift. Depending on the type of loan you applied for, certain rules apply. Some loan types don’t allow for down payment gifts at all.
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How to explain large cash deposits during the mortgage process
It all comes down to documentation. Every loan underwriter may ask for different types of documentation. Some documents that you should have at-the-ready in case they’re requested include:
- The cancelled check that was deposited
- A letter from the person who gave you the money explaining why, especially if it’s a down payment gift
- A third-party estimate of the item’s value, such as the Kelly Blue Book value for a vehicle
- A copy of the ad you placed to sell a big-ticket item like a car
The most difficult type of deposit to verify is “mattress money” — a.k.a cash on hand in your home that was never deposited in your checking or savings account. Proving the source of this type of money is difficult. If you want to deposit these funds, it’s best to wait until after your mortgage loan is approved. Or, “season” the funds before applying for your mortgage loan in the first place.
What is seasoned money?
Seasoned money is money that has been in your checking or savings account for at least 60 days. In general, lenders require your past two months’ bank statements during your loan application. All listed deposits need to come from an identifiable source. It’s also enough time for any new open account or loan to show up on your credit report.
Lenders aren’t concerned with any large deposit into your checking or savings account older than 60 days. So, if you want to make a large deposit, then apply for your loan two months after. That money is concerned “seasoned” and lenders won’t ask about it.
How much can I deposit?
There’s no simple formula to determine how much money a lender will consider a large deposit. Loan underwriters look at your overall financial situation. If you make $100,000 per year and have a ton of cash saved, then the underwriter may not ask about a $500 deposit. But, if you have just enough in your checking account to cover the down payment, then expect the lender to ask about any unidentifiable deposits — even as low as $100.
“The size of the bank deposit is only a concern if it’s out of the ordinary for that account,” says Eric Jeanette, a mortgage professional since 2002 and founder of Dream Home Financing and FHA Lenders. “For example, a $10,000 deposit may raise an underwriter’s eyebrow if the account only has a $12,000 balance and the previous activity was minimal,” explains Jeanette. “But that same deposit won’t get a second look if the account balance was high and there have been similar transactions over time.”
A good rule of thumb is to consider any deposit that is more than 25% of your usual monthly income a “large deposit.”
It’s also important to keep your accounts stable after you’ve applied and before you’re approved. “If the loan application process gets delayed, the lender may ask for another bank statement or more pay stubs,” says Jeanette. “If you have a large deposit or have depleted your funds, your loan approval may have problems.”
What to do if your bank statement shows a large deposit?
If you have a large deposit on your previous two months’ bank statements, make sure it’s from an eligible source that you can prove — your lender is going to ask about it. If the money is from a loan, then be upfront with your lender and don’t attempt to hide it. That’s fraud and your lender is going to uncover the loan anyway.
For a deposit that’s hard to document then consider seasoning the money. That way you won’t be asked about it. With some pre-planning, you’ll ensure that large deposits won’t negatively impact your home purchase or refinance loan application.
A final note on large deposits
Consider your finances ahead of applying for your mortgage loan. Be proactive about securing any documentation you may need — review your accounts like a loan underwriter and be critical. Any questionable deposit may delay the closing of your loan or even risks denial. That could cost you in fees and contract extensions and potentially higher interest rates for your loan. When in doubt, speak to your loan officer.
Check your home buying eligibility. Start here (Dec 19th, 2023)
As a seasoned mortgage professional with over two decades of experience in the industry, I bring a wealth of knowledge to the intricacies of mortgage loan approval processes. Having founded Dream Home Financing and FHA Lenders, my expertise is rooted in firsthand experience and a deep understanding of the factors that influence loan underwriting decisions.
The article you provided offers valuable insights into the challenges associated with large deposits during the mortgage approval process. Let's delve into the key concepts discussed:
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What is a Large Deposit?
- A "large deposit" refers to any substantial amount of money deposited into checking, savings, or other asset accounts. Asset accounts include CDs, money market, retirement, and brokerage accounts.
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Why Lenders Care About Deposits:
- Loan underwriters scrutinize deposits to ensure borrowers qualify for loans based on credit history, repayment ability, and property value relative to the loan amount.
- Unexplained deposits can jeopardize loan qualification, prompting the need to establish the source of funds.
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Reasons for Flagging Large Deposits:
- Underwriters may flag deposits to confirm that borrowers haven't taken new loans, have declared additional income, acquired funds from an acceptable source, or received money as a down payment gift.
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Documentation for Large Deposits:
- To explain large deposits, documentation is crucial. This may include canceled checks, letters from the money source, third-party estimates for item values, or copies of advertisem*nts for sold items.
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Seasoned Money:
- "Seasoned money" is funds that have been in a checking or savings account for at least 60 days. Lenders typically require the past two months' bank statements during the loan application, and deposits older than 60 days are generally not a concern.
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Determining Large Deposits:
- The size of a deposit is contextual and depends on your overall financial situation. A rule of thumb is considering any deposit exceeding 25% of your usual monthly income as a "large deposit."
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Maintaining Account Stability:
- It's essential to keep accounts stable after applying for a loan. Unexpected large deposits or fund depletion may raise concerns and potentially affect loan approval.
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What to Do if Your Bank Statement Shows a Large Deposit:
- If your bank statement reflects a large deposit, ensure it's from an eligible source that can be proven. Being transparent about loans and avoiding fraudulent attempts to conceal information is crucial.
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Final Note on Large Deposits:
- Proactive financial planning before applying for a mortgage is advised. Securing necessary documentation, reviewing accounts critically, and addressing any questionable deposits can prevent delays or potential denial, saving on fees and ensuring favorable loan terms.
In conclusion, navigating the intricacies of large deposits during the mortgage process requires diligence, transparency, and proper documentation to secure a successful loan approval.
