By far, one of the most confounding experiences when one goes to obtain a mortgage is the sourcing of “large deposits” on a bank statement. This is our industry’s gift that keeps giving. However, there are some ways to avoid inadvertently stepping into trouble and like with most things in life, an ounce of prevention is worth a pound of cure.
What Is a Large Deposit?
Most of the time a mortgage lender will define a large deposit as a non-payroll deposit that exceeds 50% of your gross monthly income. So, let’s say you provide a bank statement to us. We see an ATM or teller deposit for $6175 and your gross monthly income is $10K. You can expect we will ask to know what the deposit is and where it came from. Different lenders and different programs may have different thresholds, and there is subjectivity to this as well. With a borrower who makes $10K a month, it’s not unreasonable to think an underwriter might ask to know about a non-payroll deposit of $4750. It’s happened before…
What’s the Big Deal with Large Deposits?
Remember, at the end of the day, your lender is assessing your creditworthiness and your ability to repay the loan. If the money you plan to use as a down payment is not derived from savings with a documentable history, your lender will want to know if the money coming into your accounts is from a legitimate source. Or, is it a loan? If the latter, does it now require a monthly payment we must factor into the debt-to-income (DTI) ratio? The large deposit test creates a firewall for the lender where a buyer who otherwise could not afford to buy gets “propped up” by family, friends or undisclosed creditors just prior to purchasing the home. And it’s precisely these question marks that create the additional risk for the lender.
Reality Sets In
Let’s face it, if you’re planning to buy a home, you should be planning. If you’re going to be moving money to your accounts from other sources that you know will invite questions, it is best to allow these funds to “season” in your account for a period of time that exceeds the lender’s documentation requirements (usually two months). After all, I’m not going to assume all large, non-payroll deposits are illicit drug deals. There can be a lot of honest bank activity that is almost impossible to source. If you know that you’re going to be relying on this kind of funds to close escrow, get it into your accounts long before you plan to make a mortgage application.
What About Gifts?
Gift funds are allowed in most transactions and within guidelines, but practically every mortgage lender will ONLY recognize gift funds from a family member. Where large deposits that are “gifts” get into difficulty is not necessarily the sourcing, but the source. Sometimes, the family relationship is not there. How do we know who is the donor? Simple, we require a gift letter that will outline the relationship.
In the mortgage industry, two, clean months of bank statements with no large deposits are our equivalent of Eureka. I’m convinced that if every potential buyer or borrower knew this in advance, we’d drastically cut down on the number of bad customer experiences. The worst outcome for our clients is, of course, that when we source a large deposit from another bank account, that origin account also has large deposits, and so on. You can see how this would get less and less fun…quickly. So, understand this basic concept and call with any questions. If we can help you plan for a smoother transaction, we’re happy to be of service.
Where’s the beef,
Robert J. Spinosa
Vice President of Mortgage Lending
Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709
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