Verifying or Sourcing Large Deposits for Your Mortgage – Make Sure You’re Not Being Asked for Too Much

In the last 4 years, an effort has been made on the part of mortgage lenders to ensure precise accuracy on income, liabilities but also on making sure that their money is really their money.  Consequently they look for image“Indications of Borrowed Funds.”  One such indicator of potential borrowed funds is a large and irregular deposit on a bank statement and, when found, they can lead to the Spanish Inquisition of Letters of Explanation and documenting the origins of these funds.  When this guideline originally came out, it arrived without much clarity so naturally everyone took the strictest interpretation of what must be documented but those days are over now that the lending industry has new guidance.

FHA Requires that if a loan has received an Accept or Approve or Refer decision from an approved automated underwriting engine using FHA’s TOTAL Scorecard, the lender “must obtain an explanation and documentation for recent large deposits in excess of 1%% of the property sales price, and verify that any recent debts were not incurred to obtain part, or all, of the required cash investment on the property being purchased.”

That’s it.

Fannie Mae, probably in an effort to quell over documentation by the mortgage industry, provided additional clarity on how this is to be handled in a much missed announcement on November 13th of 2012 when more people had their minds on the holidays than the evolution of the mortgage industry.  Their clarification reads as follows:

Lenders must obtain the borrower’s written explanation and documentation of the source of large deposits that are reflected on bank statements. Large deposits are defined as a single deposit that exceeds 50% of the total monthly qualifying income for the loan. If the source of a large deposit is readily identifiable on the account statement, such as direct deposits where the source of the deposit is printed on the statement, the lender does not need to obtain further explanation or documentation. However, if the source of the deposit is printed on the statement, but the lender still has questions as to whether the funds may have been borrowed, the lender should obtain additional documentation.”

Yeah, . . . that’s it.

Some investors, though not all, add additional requirements to these but don’t be fooled as they are not too far afield of the basics that Fannie and FHA demand.  Here’s a typical example:

“(insert lender’s name here) requires verification of any one deposit or aggregate of deposits (not including payroll direct deposits) that exceeds 50% of the total monthly gross income but not less than $1000 in one specific account.”  But these “additional requirements” were based on the old 25% rule.  Expect them to go away or not apply in almost all cases.

And yep, . . . that’s it.

So here’s the bottom line.  If you’re being asked for more than what’s been outlined here, you’re being given special treatment.  And by special, I don’t mean the good kind.  If this is happening to you, it’s probably time to be thinking about another lender whose underwriters don’t think that there’s a monster in their closet when they go to bed.

Charles Dailey – Branch Manager, Loan Officer, Certified Military Housing Specialist – CA DOC, MN DOC & WI DFI

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Comments 4

  1. Betty Mills

    Hi, just trying to get some accurate info.. My husband & I have just finished building a new home April 16th, 2013. The loan was $135,000.00. The bank said we could get a lower interest rate by going with F May, we said great. Our closing reads to be $7,800.00.. Our savings has been depleted with 2 survey’s, Interem loan w/Attorny fee’s, etc.. My husband told the loan officer that we would have to sell something weeks before the house was finished, to get the closing. We sold our truck, do have proof. I put the money $18,000.00 in the bank. Red Flag?? So the bank tells me. I have spoken to a lawyer because I did not know what a red flag was. He said that they could take our existing home which we live in, our 8 acres & the new home.. I have sent the current bank records showing we pd the truck off in March, extra $600.00 a mth, the 18,000.00 is there. Lawyer said we needed to show proof & letter of explanation. I sent a Bill of sale and letter, can you tell me what we can expect next?? I am scared to death and making myself sick..
    Thank you

    1. Post
      Author
      Charles Dailey

      That 18K deposit will definitely need to investigated by underwriting. However, if you have a bill of sale/copy of the title transfer along with the letter of explanation, that should suffice. If you were my customer, I’d also do a “tradeline update” on the credit report to evidence that the car loan had been paid off. This would do 2 things. It would lower your debt to income ratio and add validity to the documentation of the car sale. This wouldn’t be necessary but it’s the kind of thing that would make the underwriter feel better about signing off on the large deposit/car sale issue.

      P.S. 2 surveys? Good lord!

  2. mariyn

    Hi Charles,
    I’ve been following your blogs and an avid fan of your.We have been pre- approved for an fha loan and we are suppose to close this May so the lender is again gathering information such as the bank statements,paystubs etc.They sent me the disclosures and I just notice that my loan amount is 416,500(this already excludes the 3.5 % down payment).They included the upfront mortgage insurance in the loan so it totalled to 423,000.However,in the closing cost they are charging me again the (7,289.00-uffront mortgage insurance,is this right?Isn’t it that the upfront mortgage insurance can be either paid upfront-just one time payment ( during closing or if they included it in the total loan amount,they should not be charging me anymore during closing?Please advise and thank you so much in advance.

    1. Post
      Author
      Charles Dailey

      Hi Mariyn and thanks for following. Go ahead and e-mail the good faith estimate and itemized fees worksheet and I’ll take a look at it to see what’s going on. This could be a simple misunderstanding. For instance, I love using Single Premium Financed Mortgage Insurance on conventional loans to avoid monthly PMI. These have similar disclosure issues. There is a base and total loan amount. The total loan amount is the amount of the loan after the mortgage insurance premium is financed into the loan. An insurance premium is an APR affecting finance charge and therefore must be itemized in the fee disclosures. Itemizing it AND showing it financed on the same page can have the effect of making it look like its being charges twice. Shoot it over though and I’ll take a peek. – Charles@CharlesDailey.com