When you are preparing to buy a home, having enough money for your down payment and closing costs is only part of the equation. Your mortgage lender may also need to verify where those funds came from.
This is known as asset verification or sourcing funds. It can become an unnecessary headache if money is moved between accounts, large deposits appear without documentation, or gift funds are transferred before you receive instructions from your loan officer.
The good news is that most of these problems are easy to avoid with a little planning.
Why Do Mortgage Lenders Verify Your Assets?
During the mortgage approval process, lenders may review bank statements and other financial records to verify that you have sufficient funds for your down payment, closing costs and any required reserves.
Depending on the loan program and the circumstances, the lender may also need to document the source of certain deposits or transfers. The goal is to confirm that the funds are acceptable under the mortgage program and that they are not coming from an undisclosed loan or another ineligible source.
1. Don’t Deposit Cash Without Talking to Your Loan Officer
Cash can be difficult or impossible to document because there may be no acceptable paper trail showing where it came from.
If you have cash that you plan to use toward your home purchase, talk with your loan officer before depositing it into the account you intend to use for closing.
2. Keep Copies of Checks Before Depositing Them
If you receive checks outside of your normal payroll deposits, keep copies and retain any documentation explaining where the money came from.
This can be especially important when several checks are deposited together, such as money received for a wedding, birthday or other special occasion. Once multiple checks are combined into a single deposit, documenting each individual source can become more complicated.
3. Avoid Moving Money Between Accounts Unnecessarily
Transferring money between your own accounts is not necessarily a problem, but it can create additional documentation requirements.
For example, if money moves from savings to checking and then into another account, the lender may need statements or transaction histories from multiple accounts to document the trail of those funds.
If you are already in the mortgage process, ask your loan officer before moving significant amounts of money around. Sometimes the simplest approach is to leave the funds where they are until you receive instructions.
4. Don’t Open New Accounts Just to Hold Your Closing Funds
Opening a new bank account shortly before or during the mortgage process can create another account that may need to be documented.
If there is a legitimate reason to open or move funds into a new account, that may be perfectly acceptable. Just discuss it with your loan officer first so you know what records you should keep.
5. Get Instructions Before Receiving Gift Funds
Many mortgage programs allow eligible gift funds to be used toward a home purchase. However, there are rules governing who may provide the gift and how the gift must be documented.
If someone plans to give you money for your home purchase, contact your loan officer before the money is transferred. Following the correct process from the beginning can prevent unnecessary requests for additional documentation later.
6. Don’t Assume Every Large Deposit Is a Problem
Borrowers sometimes hear that every deposit over a particular dollar amount must be explained. Mortgage guidelines are more nuanced than that.
Whether a deposit needs to be documented can depend on the loan program, the size and nature of the deposit, your normal income and account activity, and other circumstances surrounding the transaction.
Rather than relying on a universal dollar amount, ask your loan officer if you are expecting an unusual or significant deposit while preparing for a mortgage.
7. Keep a Paper Trail
If money does need to move, save the records associated with the transaction. This could include bank statements, transaction histories, deposit records, copies of checks or other documentation showing where the funds originated and where they went.
A clear paper trail can make the underwriting process much easier.
What Should You Do Before Applying for a Mortgage?
If you expect to purchase a home soon, one of the easiest rules to follow is: avoid making unusual financial moves without first checking with your loan officer.
You do not need to stop using your bank accounts normally. Pay your bills, receive your regular income and handle your everyday expenses. The concern is primarily with unusual deposits, undocumented funds, significant transfers or financial changes that may require additional explanation.
If you are unsure about a transaction, asking before you make it is usually much easier than trying to reconstruct the documentation later.
Planning to Buy a Home in Maryland, DC or Virginia?
I have worked with homebuyers throughout Maryland, Washington DC and Virginia for more than 20 years. Part of my job is helping borrowers prepare for underwriting before small issues become larger problems.
If you are preparing to purchase a home and have questions about your down payment, gift funds, bank statements or the documentation needed for your mortgage, contact me. I’ll be happy to review your situation with you.
Ready to explore your options? Start your prequalification online.
Mortgage documentation and asset requirements vary by loan program, lender and individual circumstances and are subject to change. This information is for general educational purposes and is not a commitment to lend.
