Large Deposits

Recently I was working with borrowers who were holding a lot of cash and they wanted to use that cash as the down payment on a home. When I say they were holding cash I mean they were holding actual, physical cash that hadn’t seen the inside of a bank.

There isn’t anything wrong with holding a lot of cash, aside from the possibility of losing it, having it stolen, or having it destroyed in any number of natural disasters like fires or floods. But holding a lot of cash does make it challenging if you are trying to use it in the process of securing a loan to purchase a home. As these borrowers were.

There are several reasons for this.

Lenders, Brokers, and Loan Officers have a legal (as well as moral) responsibility to watch for criminal enterprises and to make reasonable efforts to ensure their transactions are not part of any criminal activity like money laundering or the funding of terrorist activities. This is one reason why we need pay stubs, W 2, Bank Statements, and occasionally tax returns. The movement of money, deposits, and withdrawals, are cross-referenced.

Lenders, Brokers, and Loan Officers also have a responsibility to qualify a borrower for a loan. Qualify’ing a borrower means evaluating income and assets and determining the likelihood of consistent future earnings/income necessary to make payments on the loan. If the origin of that income cannot be verified, as it often is with large amounts of cash, it generally cannot be used as part of the qualifying process. This reduces the amount a borrower can be qualified for.

If you are holding a lot of cash you cannot just deposit the money in a bank and call it good because large deposits of cash are scrutinized and need to be explained or sourced. One of the primary reasons lenders scrutinize large deposits is that people sometimes borrow money from other sources to have enough for a down payment on a house.  Borrowed money usually comes with a required payment that the lender needs to include in calculating the ability to repay the new mortgage.  So the lender is looking for undisclosed debt and the resulting debt payment.

So what is a large deposit? Well, that depends on who’s defining it.

The Federal Housing Administration defines a large deposit as “Any deposit that exceeds 1% of the property value and recently opened accounts must be sourced.”

Sourced means the borrower has documentation showing where the money came from.

If the borrower cannot source the deposit then a letter of explanation is required describing what the deposit was, where it came from and why it cannot be sourced. The underwriter will then remove the deposit and the funds cannot be used for closing.

For Conventional (non-government) loans, a large deposit is defined as “Any deposit that is 50% or more of the Borrower’s total monthly income.”

If the deposit is above 50% of the total monthly income that deposit needs to be explained and sourced by the borrower. If the deposit cannot be sourced then the underwriter will remove the deposit and the funds cannot be used for closing or held in reserve.

Whether FHA or Conventional, large cash deposits that cannot be sourced may not be used in securing a loan for a property. Borrowers holding large amounts of cash should keep this in mind if they plan to be shopping for a home in the near future.

Of course, if you are making a full cash offer none of this applies.

For more information contact Aaron Walker or Jay Rapson at Aaron Lending, LLC.


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