One topic … one direction provided during the Mortgage Process that seems to baffle and frustrate my prospective home buyers during their Mortgage Process, surrounds the sourcing and documenting of Down Payment and Closing Cost Funds.
When I touch upon this portion of the Process I often hear the comment, “it shouldn’t matter where the money comes from” from my Borrowers. There also seems to be a mindset that their Earnest Money is something other than an initial portion of the Down Payment funds.
Yes … but. (And there’s always that “but”, isn’t there?)
This is where many of the questions or misunderstandings seem to start regarding the paper trail, documentation, and sourcing of Funds …
Consider this: If the Earnest Money is part of the Down Payment Funds, should it not follow:
- That the Earnest Money Check be written by the Buyer(s) of the home (my Borrower(s)?
- That the Earnest Money Check be from the Buyer(s) own Account?
If the Down Payment Funds must be verified and reviewed first, by the Loan Officer, then by an Underwriter: Then, An Earnest Money Check must be verified and noted as the Buyer’s Funds.
Why? The Underwriter must ascertain that all Funds are free and clear of future need for repayment or debt.
To be more precise: An Earnest Money check should be WRITTEN upon or WITHDRAWN from the Buyer(s)/Borrower(s) checking or savings account to avoid problems and delays in Underwriting. By doing so, the all-important paper trail … the trackable, verifiable source of funds I so often refer to in my posts … is successfully created.
Remember: Monetary Gifts are an acceptable form of Funds. A check written by a Donor can be acceptable to an Underwriter. But it is required that these funds must also be documented and provide a verifiable paper trail.
Any Donor providing such gift funds must be aware that their monetary gift will have to be “sourced“, just as any Buyer’s would be. Should a Donor (relative) not wish to undergo scrutiny of their accounts or provide bank statements verifying them, it will be a problem for my Borrower.
This following rule really stumps my Home Buyers/Borrowers too:
CASH is not an appropriate form of funds …
As related above, a paper trail and proof of funds is required. (I had to tell one of my Borrowers … “no, a picture of each paper bill does not sufficeand fulfill the requirement for proof of funds“.)
Statements of Accounts greatly matter too. Underwriters want to know:
- How did Funds in the account get there?
- How long have the Funds been in the Account?
- Were Funds a Direct Deposit of Payroll Checks?
- Were Funds from an Income Tax Refund check?
- Were Funds transferred from another account?
- Were Funds Cash Deposits?
- Were Funds Personal Checks deposited at the bank?
- Were Funds Cash Advances on Credit Cards?
- Were Funds received a Personal Loan of some type? And if so, do those Funds carry a monthly repayment obligation and represent new debt?
Large Deposits matter! (TYPICALLY, Anything over $1,000,00 is considered a large deposit). They especially matter when Underwriters analyze the most recent … 60 to 90 days … of a Borrower(s) Bank Accounts. This analysis takes place in each and every Mortgage Process. You’re not being singled-out.
Bottom line, the best and most fluid route to a fluid, speedy, and successful Closing is: Play it safe! Consult with me on all financial matters immediately before and during your Real Estate transaction and Mortgage Process.