Mortgages

The Biggest Mortgage Mistake Consumers Make

Comments 23 Comments

Despite the technical rigors of qualifying for a loan today, there is something more ominous lurking in all mortgage applications that most consumers wouldn’t think twice about.  Specifically, we’re talking about the eligible funds for the mortgage transaction. You might have the money in the bank, but it isn’t that simple. A lender will still want to know who the funds belong to, and how the money got there.  And if you can’t document these things, your mortgage could get delayed — or denied.

Bank Statements Don’t Reveal the Whole Picture

Bank statements show the funds in your account, but whether these funds are legitimate is another question indeed. And cash deposits that are inconsistent with your banking history will be under the lender’s magnifying glass. In fact, cash deposits cause more problems and scrutiny for consumers trying to secure mortgages credit today than any other credit item.  So let’s take a look at the typical scenarios homebuyers need to be ready for when documenting their cash in the bank.

If any deposit is more than 25% of your monthly income…

Then monies will have to be sourced with a clear letter of explanation, or a potential gift letter if the money came in the form of a gift, along with a statement from the person gifting that money showing they had the ability to do so.

If any deposits are less than 25% of your monthly income…

Then these funds can be used in the loan transaction, although the consumer may be asked to explain where the funds originated. However, no paper trailing will be required.

If cash is from a side job or any other exterior source other than your occupation…

Then — if it is needed for the mortgage transaction — that money will have to be “seasoned” for a period of 60 days, meaning those funds are ineligible for use toward the mortgage until two statement cycles have passed.  Then those funds will be eligible.

If a deposit is a gift…

Then the person giving the gift needs to show on paper a clear ability for them to gift money to the recipient. In other words, a friend of the person giving the gift can’t make a deposit in the giftor’s account without getting a clear and concise explanation including a gift letter and subsequent paper trail with bank statements showing where the funds originated and where the funds ended up.

If additional reserves are needed, e.g. two months’ worth of mortgage payments liquid in the bank (which is typically what’s needed)…

Then consumer must meet the 60-day seasoning requirement, unless the funds are from paychecks in the normal course of pay periods.

How This Mistake Could Cost You

Should any one of these situations occur, plan on a longer escrow followed by a longer interest rate lock. The longer a transaction takes, the higher the cost. Circumstances like gathering together financial documentation at the last minute, sourcing monies and/or getting contractual purchase contract extensions, which often run as high as $100 per day for every day the transaction does not close on time, are all examples how important timing is in procuring loan approval.

It is in the consumer’s best interest to handle the paper trailing concerns and credit characteristics with the lender upfront, so it doesn’t become an issue later on when loan contingencies need to be removed or when the refinance slated to close is delayed because an updated statement shows deposits inconsistent with the consumer’s income.

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  • MichaelJ

    Good advice that a lot of consumer/borrowers don’t know or understand and also resent providing info. As a professional also in the industry, I can relate. Many feel like it’s an infringement of privacy and doesn’t make sense to them. But if you are patient and explain various reasons, they come to understand.

    • Bart Hawkins

      These reasons are entirely contrived and represent nothing more than snooping, at best, and far worse.
      The lenders have no business questioning ANY funds listed in my account, other than the fact of verifying with the bank that the STATMENT itself is legitimate (and therefore matches with reality).

      • Colin

        Bart,

        You should consider what would happen if 25% of your neighbors decided to sell their homes at the same time and all of the Buyers used undisclosed personal loan proceeds to fund their down payments.

        I’d bet that a year later when you realize you lost 30% of your equity due to their foreclosures bringing your property value down, your opinion on the topic would change.

        How soon we forget what caused the mortgage crisis in the first place.

  • Bart Hawkins

    This entire set of requirements is nothing more than thievery in the form of a scam. HOW DARE these ******** have the effrontery to make you prove the sources OF YOUR OWN FUNDS?
    Then how dare these ******** have the effrontery to require such an enormous paperwork trail, etc. etc. for lending against an ENTIRELY SECURE asset?
    How dare they?
    Ask Bill Clinton and Barack Obama. They renewed Federal permissions behind such scrutiny.

    • n o

      yes they need to create underwriting rules just for you.

      Here is what you do not understand, there are millions of loans and the guidelines are there for a good reason. If you want the cheaper, cookie-cutter, conforming loan then stick to those rules.

      If you do not like the standard guidelines you can still get a mortgage, just look for “non-conforming” loans and get more “customized underwriting”; just to pay extra for that.

      • ScottSheldonLoans

        Essentially correct,creme of the crop loans come at a price, which is FULL supporting documentation, dotting all “I’s” and crossing all “T’s.” This is regulatory environment we all have to play brought on by the years of lending abuses 2004-2007. Unfortunately, now the pendulum has swung so far back, that “makes sense” underwriting is tossed out the window in favor a checklist.

        • n o

          when did you ever get to pull cash out of a mattress and use it for a down-payment (on a conforming loan)?

          I am doing a refi now with Provident and getting a bit of a grilling. Great rate though. I think the issue is our tax returns are 200 pages (with reports) but in the end it is all W2, 1099 and lots of Schedule E and C. I think the underwriter is lost.

  • Bart Hawkins

    Arrogant buzzards (since disquis didn’t and won’t, being an entirely liberal collection of buzzards itself, “approve,” my comment).
    REBELLION is in the air!

  • flankton

    All I will say if my whole loan is not approved merely because of a 1.5K cash deposit I made with money i have been saving under my mattress for 15 years, JUST TO BUY A HOUSE ONE DAY…. no.

    To put it another way, I study, I go to school, I work, I pay my loans on time… for years. i build a 813 credit score. All along I dont take vacations, I sock money away, and I save and save. I go to buy a home and they tell me the reason I cannot get the loan is because I put MY money in MY bank account?!?!?!?! Are you kidding me. This is the beginning of something very bad. I dont know what, but this cannot be good

  • SolidGOP

    Actually, if you have a job with direct deposit, then take whatever “gift” money you got, stick it in the closet, and live off that, while your direct deposits build up. That way the money is virtually invisible to THE MAN. By the way, the reason they put you through all this (and should have been mentioned in the article) is that they don’t want you “informally” borrowing money from others to meet the financial requirements for your home loan, as then your ability to pay for the house has to compete against your informal loan (i.e., an “informal loan” is one that is not on credit report, but can still be a legally binding debt, particularly if documented by a loan agreement).

    Of course with the country heading back to loaning out money on steroids, pretty soon we’ll be back to having the loan officer verify that you can fog a mirror, and then giving you your money.

  • Fraud certified

    Being a due diligence underwriter or “mortgage auditor” I can tell you that these rules and regulations have been in place long before 2005 when I entered the field. The reason for the crash was blatant disregard for the existing laws. Get your damn facts straight before you pass your bull off as knowledge. All this information is available for those not too lazy to do real research so that they have facts/truth instead of hateful lies.

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  • sheeplemakemesick

    Money is money. The government really needs to get OUT of any private transactions especially since they can’t even pay their own debts or balance a budget EVER. The “patriot” act can burn in hell with G. W. Bin Laden.

  • http://www.credit.com/ Credit.com Credit Experts

    Kiersten —

    We put your question to Joseph Kelly, president of ArcLoan.com. He suggested that you speak with a different recommended lender.

    Addressing your broader concerns about tip income, he said that if you have been depositing your tips into your bank account AND your tips are reported on his pay stubs, you should be able to use that cash as an allowable “source of funds” for a mortgage. If there are significant differences between what the pay stubs show for tips and his deposits there could be a problem because there is not documentation for where the cash is coming from.

    Are you using the tip money to qualify as income for the mortgage? In that case, you would need a two-year history of the income (it will be averaged) and the lender will need to be able to verify the tip income.

    In the meantime, you might want to consider whether this is the right time for to buy. Read 5 Times It Pays to Wait to Get a Mortgage.

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  • john

    The reason for sourcing funds makes sense in that you cant borrow money, or use illegally earned money to qualify for a loan. But the fact that all you have to do is wait 3 months to “season” it just goes to show you that it’s really just an excuse to delay the loan, increase closing costs, and ding your credit to raise your interest rate after you are denied the first try. It’s the banks predatory tactics on the average consumer (since rich people just pay their way around these things)

  • CH

    Ridiculous. My husband and I are going through this right now. I have saved cash for close to 30 YEARS (from odd jobs, selling personal items, etc.) and put it in my safe. Now, we are wanting to buy a new home before our current one sells, and I am being told that my 20K in CASH cannot be used as CASH reserves, even if deposited into an account. But a retirement or 401K account could. Ummm…. If I lose my job or have an emergency and need funds to pay my mortgage, which one do you think I could get my hands on faster? Makes no sense to me.
    Whatever happened to cash is king?

    • ScottSheldonLoans

      Cash is certainly King just put the money in the bank account let it sit there for two months and you are good to go problem solved:).

  • Frankthetank

    I am actually having this current issue, I am a server therefore 90+ percent of my income is in cash. At the end of the period my earning statement reflects the amount of tips earned but my check is not negotiable because I am payed on daily basis at the end of the shift. Well after a couple days i deposit my money so I can be able to pay my bills online or what not. Now my lenders is asking me about this “transactions” as if its mystery money. And here I am researching on how to word it in a way where they can understand it without raising any further questions.

    • ScottSheldonLoans

      The only way to make the money good so to speak is to have in the bank account for a minimum of 60 days were be able to source with get funds and the origin of where those monies began i.e. someone else’s bank account, lender will also need a copy of that bank statement for a minimum of two months showing they had the ability to provide those monies.

  • ScottSheldonLoans

    Yes the lender does
    require “sourcing” of where the money originated. If a buyer was to get gift
    funds from an individual stating the relationship to the buyer, there is
    nothing that actually demonstrates they have the ability to provide the money.

    In other words, the reason lenders ask for
    this is to prevent using potentially tainted funds and/or money laundered funds
    for the purposes of buying a home with debt. The lender does not care about the
    other deposits the giftor has, all the lender cares about is showing on paper
    that the person gifting the money actually has the ability to do so. Lenders
    now require two months of bank statements on the origin of the gift funds along
    with the signed gift letter stating the relationship in order to use gift
    monies in a purchase transaction. Note on conventional loans the person giving
    the gift has to be a blood relative.

    If the sourcing of the
    gift cannot be obtained, the money has to be treated as illegitimate funds
    wherein the only way to use those funds, is after funds have been in the bank
    for at least 60 days.

  • Expert

    There are ways that you can still purchase. There is hope. It all depends on your detailed situation and file…matter of speaking to the right loan officer to make sure they have looked at all options and overlays on which the lender allows.

  • ScottSheldonLoans

    Nope you should be fine. It’s joint funds. The loan in your name only would have to be a conventional loan, not VA, fha or USDA as lender needs to pull credit of the other spouse and then all debt would need to be considered. Conventional doesn’t have that restriction.

  • http://www.credit.com/ Credit.com Credit Experts

    We’re sorry; we can’t help with that one.

    Your best bet is to ask your bank.

  • ScottSheldonLoans

    Yes, sourcing of all cash deposits is required.

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