Avoid Loan Application Denial for Undocumented Cash

By Liz Clinger Updated on 6/23/2017

Several problems may result in your home loan application being delayed or denied. One issue, in particular, creates most of the delays in the mortgage application process --undocumented cash deposits. 

 

You must show that you have a sufficient down payment when applying for a home loan. However, your down-payment funding must be from an appropriate source. 

Mortgage applications can be delayed, or even denied if the source funds cannot be accurately explained. 

Guidelines for down-payment sources have recently changed due to prior fraudulent transactions that led to the housing crisis. Now, there is a deeper inquiry into where your down-payment funds came from, and thus creating a delay in the home loan process.

Bank Statements Aren’t Enough

Firstly, a lender will review your bank account to verify the down payment. More than just looking for a sufficient dollar amount, the lender will look at your statements to indicate whether these funds are from a legitimate source. They'll compare previous cash deposits and look for anything inconsistent with the history and habits of account activity.   

You must be able to indicate where the deposited funds came from precisely.  For homebuyers, a 60-day history of your bank account is required and any deposits exceeding 25% of income must be shown.

Here are some examples of situations in which you may need to provide additional explanation or documentation of your down payment source:

Cash deposits exceeding 25% of monthly income 

Any cash deposits which total 25% or more of a borrower’s monthly income will require a clear explanatory letter that justifies the source of the funds.  This means that "mattress money" cannot be used unless it's been deposited prior to the 60-day history required.  

Cash Deposits Less Than 25% of Monthly Income

For cash deposits less than 25% of a borrower’s monthly income, lenders may ask you to explain the source of these funds, although documentation will likely be unnecessary.  However, you'll want to avoid making numerous small deposits as this may create more damage rather than good.

Funds Gifted for Down Payment

Funds that are gifted require a clear written account from the party giving to explain the source of the funds. Essentially, the giftor will be held under the same scrutiny as the mortgage borrower and must provide an explanation for any inconsistent deposits leading up to the gifting.  For the gift donor, a 30-day statement documenting of sufficient funding and no large deposits will be required in addition to the letter of explanation.

Additional Sources of Income

If you acquired the funds through a different source of employment or other outside source, the funds must undergo a “seasoning period,” during which time they cannot be applied toward the mortgage. This period lasts for 60 days or two statement cycles before the funds are eligible for use.

Consequences of an Undocumented Cash Deposit

If the lender must review your bank statements to verify a cash deposit, your mortgage application will be delayed. Moreover, delays in fund verification may require you to get a contract extension which could cost up to $100 per day! If the explanation of the funds is unsatisfactory, you could face even lengthier delays or have your loan application denied.

Be conscious of all of your bank activity when preparing for a mortgage application. With a proactive mindset, you can avoid any issues with cash deposits and close your loan on-time with no delays or hiccups.