Mortgages today rely on the ability to verify everything and that means even the small things that you would not think about. Sometimes, however, standard verification is not enough – such as is the case with large deposits in your bank account. If you are unable to verify where the deposit came from and its validity, it could result in a denial of your mortgage application.
More than Bank Statements
You might think that bank statements are enough to validate the funds that you have available to purchase a home or even to refinance, but there is more than meets the eye in this step. Lenders need to be able to verify that the money in your bank account is actually your money and not borrowed by someone in order to gain a mortgage approval. Every deposit will be closely evaluated to determine if it falls in line with your income or looks out of place. This is especially true for deposits that were from cash. If they cannot be traced back to your income, they will be questioned.
Every lender will have their own threshold in regards to which deposits they will scrutinize. In general, any deposit that is over 25 percent of your income will need further verification. The lender might start by asking for a Letter of Explanation, or LOX, regarding the deposit and requesting you to provide the source. You will then be required to provide a paper trail that shows exactly where the funds came from and how they will be used. This is in an effort to avoid borrowers from bulking up their accounts temporarily in order to look good for approval, when in actuality the money does not belong to them.
Using Cash Income for Approval
If you have a job that you do on the side or as a seasonal gig and get paid cash, you might be able to use it for the approval of your loan if you can prove the income. You will also need to hold onto those funds for a period of 60 days before they can be used to qualify you for the loan. Keep in mind that you will need to provide proper documentation that the cash did in fact come from some type of work; you might even have to find a way to prove that you did the work to ensure that the cash is valid.
It is still possible to obtain gift money in order to have a down payment on a home or to use for closing costs, despite the rigorous scrutiny that every loan has to go through. In general, the person providing the funds will go through the same evaluation though. The lender will need to determine the source that his funds are coming from in order to provide you with the gift. The person providing the funds will also need to provide a gift letter that states that the funds are a gift that he is willingly supplying for your purchase of a home.
A paper trail is necessary in order to document any income that you plan on using for your loan approval. Any out of the ordinary deposits will be looked at with care to ensure that it is not a deposit that does not belong to you. Lenders are very careful about who they lend to today, making them much more suspicious of deposits other than those that are obviously from your current income. The longer that the process takes to approve your income and assets, the longer your loan approval will take and the more it will cost you in the end. If you know ahead of time that you have deposits that will need explaining, you can start gathering the paper trail and crafting your Letter of Explanation now in order to shorten the length of time that your approval will take.Click to See the Latest Mortgage Rates»