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 “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.”
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
The Home Buyers Scouting Report® is provided directly to the buyer by HBM II, a licensed national real estate brokerage service company, not to or through a lender. The FREE home finding service is provided directly to prospective homebuyers by HBM II and its real estate brokers, as part of their ordinary real estate brokerage services. HBM II, Inc. works cooperatively with other real estate agents across the United States in attempting to find ready, willing and able buyers for homes listed for sale. The role of the Preferred Loan Officer is to assist in determining a comfortable home price range for Home Buyers Marketing II, Inc. (HBM II) to use when it is searching for property listings within the buyer’s search criteria.
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