Large Deposits Can Jeopardize Your Mortgage Approval

It is already a common knowledge that when you applied for a mortgage, every nook and cranny of your financial state will be scrutinized. From your credit rating to financial activities in your bank account, nothing will be left unchecked.

Your lender will require you to provide the last two to three months' savings and checking account statements. While having a healthy bank account helps you qualify for a mortgage. This assumption does not hold true at all times. When you deposit a large amount of money, say from a sold car you no longer need, or wedding gift checks, it can jeopardize your chances of being approved for a mortgage if you cannot prove its source. 

Why Do Lenders Care About Large Deposits?

Deposits like your salary checks are fine because they are regular credits and can easily be explained but any unusual large deposits needs to be explained and  lenders will want proof of its source. If a significant percentage of your savings were deposited while you are in the process of getting a mortgage, your lender will wonder if you are taking a new loan to make your finances look better.

If you fail to provide documentation of the source of those deposits, the underwriter may think that you opened a loan or took a cash advance and deposited them into your account. Taking a new loan or credit while you are also in the process of getting a mortgage doesn’t paint you as a good mortgage candidate. A new loan means new monthly payment and it would affect your debt-to-income ratio. It also paints a picture that you don’t have enough money in your account to handle the payments that come with a mortgage loan. 

What Is Considered a Large Deposit?

A large deposit is any significant addition of money into your bank account(s). What is considered a large deposit is subjective to your situation.

For government mortgages such as FHA, any single deposit greater than 2% of the sales price on a purchase transaction needs to be sourced. For conventional mortgages, unusual deposits that exceed 50% of the gross monthly income will need proof of source.  For example, if your monthly gross income is $3,500, any deposit that is not part of your payroll exceeding $1750 would need to be sourced. 

What Proofs Are Needed?

To provide documentation of the source of the large deposit, first, you will need to provide A Letter Of Explanation explaining the source of the money. Second, you will need paper trails:

• If the deposit was a transfer from another bank account, you need to supply a copy of the bank statement of the other account detailing the withdrawal.

• If the money is from the sale of a good, you will need to supply a receipt.

• If the money is a gift from a relative or domestic partner, you will need to provide a signed gift letter from the donor showing the amount, when it was transferred, and statement that no repayment is expected.

• If the deposit was wedding gift checks, you will need to provide copies of every check.

What To Do If You Can’t Provide Documentation?

If you already have a large deposit on your account and it is hard to document, ask your loan officer if you can qualify for a loan without showing that account’s bank statement.

You can also wait until you are issued a newer statement where the large deposits are no longer showing because you don’t have to explain those deposits. Seasoned money or  money that have been in your bank account for at least two or three months no longer required sourcing.

Finally, if you know that providing the source of the large deposit is going to be hard, do not deposit it into your account if you plan to apply for a mortgage loan in the next two to three months.  All it takes is a little planning to make sure the mortgage process will be as smooth sailing as it can be.