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Scott Sheldon
Scott Sheldon is a senior loan officer and consumer advocate in S... Read More
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After months of searching, planning and saving, you’re finally ready to apply for a mortgage. You think you have all your ducks in a row—you have great credit and a killer history of making your loan payments on time.
But there’s one small hiccup. A lender noticed that you’ve had a recent, slightly unusual cash deposit in your bank account. Even though the cash deposit is perfectly explainable, it still stalls the mortgage process.
How do you explain a cash deposit for a mortgage? If you’ve had a recent deposit in your bank account, you’ll need to document it as early as possible. So before you even start the mortgage process, make sure to learn how a cash deposit can impact your mortgage application.
What is a Cash Deposit?
A cash deposit is any amount of money that is transferred into your bank account, whether it was put in your savings or your checking account. This could be either a check, a transfer or actual cash. As long as it’s money that was wired or directly put into your bank account, it’s considered to be a cash deposit.
Why Does a Cash Deposit Affect Your Mortgage?
That’s the big question. Why do lenders care about cash deposits? It’s pretty simple—lenders need to make sure that your income, along with any additional assets, are legitimate. So a lender needs to verify that a recent or large deposit into your bank account is legal, and not a loan or other debt obligation.
Why Would You Need a Large Deposit for a Mortgage?
It’s no secret that mortgages aren’t cheap. If you don’t have the current funds to cover the costs of obtaining a mortgage, you might need to transfer a good amount of money into your bank account. This could come from a separate savings account, a recent paycheck, etc.
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There’s also the matter of a down payment. Down payments can range from 0% to 20%, or more, of the total cost of the home. How much your down payment is depends on how much you’re financing, the loan type, your credit score or personal preference. If you’re looking to get mortgage approval, it’s very likely you’ll need to cover a down payment.
Plus, as mentioned before, you’ll probably have a few other expenses to cover. Closing costs, possible repairs to your new home or inspection fees can all add up pretty quickly. Some people save up for years before buying a home so they can cover these expenses.
Why Does Your Lender Care About Deposits?
When a lender reviews your credit history and financial situation for mortgage approval, they’re trying to answer a few specific questions:
- Do you have a history that demonstrates you’re likely to pay back a loan as agreed?
- Do you have the funds to afford the loan you want to take out?
- Does your loan application and situation comply with any special rules for the loan type?
If you have a recent, large and unusual deposit in your bank account, it could give a lender a reason to pause. They may want to know where the money came from so they can adjust your mortgage calculations if necessary.
What Is Considered a Large Deposit for a Mortgage?
It’s not typically the size of the deposit that’s an issue, but whether or not it seems unusual for your account. For example, if you regularly carry a $100,000 balance in your account with deposits of $5,000 coming in from time to time, the bank likely won’t question a deposit of that amount. But if your balance was $1,000 regularly and you get a sudden $5,000 deposit, you might have some explaining to do.
Here’s a rule of thumb to follow—if a deposit is more than 25% of your monthly income, it’ll probably raise eyebrows. If you make $20 an hour, you earn $41,600 annually without overtime. That’s roughly $3,450 a month, so a deposit of more than $866 that’s unrelated to your regular income might be investigated by lenders.
You obviously don’t have to explain usual deposits, like child support or obviously marked income that you’ve already accounted for in your mortgage application. You also won’t need to explain deposits such as your tax refund, which are clearly marked on your statement. What mortgage companies will ask about are large cash deposits. Typically, what a mortgage company wants to document about a large unusual deposit is, if the deposit complies with the loan program you are approved for, if it was a gift for your down payment or if it was a loan that needs to be calculated into your debt to income ratio.
Seasoned Cash Deposits Might Not Count
Lenders typically only ask for two or three months of statements. If you deposited cash months or years ago and have been holding that money in savings for this purpose, mortgage companies likely won’t ask for a paper trail on it. It’ll be considered part of your savings.
How to Explain a Cash Deposit for a Mortgage
If you’re asked to explain your cash deposits for a mortgage, make sure you’re honest and clear about where the cash came from. If a mortgage lender is asking for proof of deposit, you might need:
- Copies of receipts or contracts related to the transaction, especially if you earned the money via a side gig or freelancing.
- A gift letterstating that the money is a gift and you do not have to pay it back.
- Documentation of a loan or grant, particularly if it’s part of an approved program for assisting with down payments.
Know that the source of the deposit could disqualify you for mortgage approval. For example, if you take out a personal loan for your down payment, you’ve added another monthly payment to your budget. The mortgage lender would need to go through the approval process again with this debt in mind.
In other cases, a loan or even a gift to help you cover the down payment could derail your home hopes. That’s because some mortgage programs have rules against this type of funding for down payments.
The Bottom Line With Cash Deposits for Mortgages
Make sure you understand the requirements of the potential mortgage program before you seek extra funding to cover a down payment or other expenses. And make sure to document any unusual deposit transferred to your bank account before applying for a mortgage.
Before you start shopping for mortgage loans, visit the free Credit Report Card at Credit.com. This lets you see how your credit sizes up and address any issues in your history before you apply. Then, you can browse mortgage options and rates and apply for a mortgage loan that best matches your needs.
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December 13, 2023
Mortgages
I am an expert in personal finance, credit, and mortgage-related topics with a comprehensive understanding of the concepts discussed in the provided article. I have hands-on experience and a depth of knowledge in these areas, making me well-equipped to explain and elaborate on the key concepts presented.
Now, let's delve into the essential concepts covered in the article:
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Cash Deposit for a Mortgage:
- A cash deposit refers to any amount of money transferred into a bank account, whether through checks, transfers, or actual cash.
- Lenders scrutinize cash deposits to ensure the legitimacy of the borrower's income and additional assets, verifying that the funds are not from loans or other debt obligations.
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Importance of Large Deposits for a Mortgage:
- Mortgages often require a significant amount of funds, including down payments, closing costs, and other expenses.
- Large and unusual deposits in a borrower's bank account may prompt lenders to investigate the source, as it could impact the borrower's ability to afford the loan.
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Reasons for Large Deposits:
- Large deposits may be necessary to cover down payments, which can range from 0% to 20% or more of the total home cost.
- Borrowers might also need funds for closing costs, repairs, or inspection fees associated with purchasing a home.
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Lender's Concerns Regarding Deposits:
- Lenders assess a borrower's credit history and financial situation to determine their likelihood of repaying the loan.
- Unusual deposits can raise concerns, leading lenders to inquire about the source to ensure compliance with loan rules and to make necessary adjustments to mortgage calculations.
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Defining a Large Deposit:
- The size of the deposit isn't always the issue; it's the perceived unusual nature of the deposit in the context of the account.
- Deposits exceeding 25% of the borrower's monthly income may attract attention, prompting lenders to investigate further.
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Documenting Cash Deposits:
- Borrowers may be required to provide documentation for recent cash deposits when applying for a mortgage.
- Documentation may include receipts, contracts related to transactions, gift letters, or proof of loans or grants, depending on the source of the deposit.
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Consideration for Seasoned Cash Deposits:
- Lenders typically focus on the most recent two or three months of bank statements.
- Cash deposits made months or years ago, held in savings, may not require a detailed paper trail as they are considered part of the borrower's savings.
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Impact on Mortgage Approval:
- The source of the deposit could affect mortgage approval.
- For instance, using a personal loan for the down payment may add another monthly payment to the borrower's budget, requiring a reassessment of mortgage approval.
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Advice for Borrowers:
- Borrowers should understand the requirements of their chosen mortgage program before seeking additional funding for a down payment.
- Documenting any unusual deposits beforehand is crucial to avoid complications during the mortgage application process.
In conclusion, a thorough understanding of these concepts is essential for individuals navigating the mortgage application process and seeking financial stability.
