Behind Closed Doors – The Truth About Borrowers’ Funds

Lenders typically require borrowers to contribute a down payment (equity) towards the purchase of a home. The source of these funds can affect the loan approval process.

General acceptable sources of down payment and closing cost funds may include personal savings, investment accounts, gift funds from family members, or proceeds from the sale of an existing property.

Lenders generally prefer to see that the funds have been seasoned in the borrower’s accounts for a certain period (usually 60 days) to ensure they are not borrowed or a result of undisclosed debts.

1.    Gift Funds:

Gift funds from family members or close relatives can be used for the down payment or closing costs. Lenders often require a gift letter signed by the donor, stating that the funds are a gift and not a loan, and that repayment is not expected.

Lenders may request documentation, such as bank statements or wire transfer records, to verify the transfer of gift funds.

2.    Borrowed Funds:

Borrowed funds, such as personal loans or credit card cash advances, are generally not accepted as a source for the down payment and closing costs. Lenders want to ensure that borrowers have the financial capacity to repay the mortgage without additional debt obligations.

3.    Seasoning of Funds:

Lenders often require a “seasoning” period for funds to ensure they have been held in the borrower’s accounts for a specific timeframe, typically 60-90 days.

Seasoning helps verify that the funds are not borrowed or a result of undisclosed debts. It provides reassurance to lenders that the borrower has the necessary financial stability to support the mortgage payment. Underwriters will carefully review bank statements and transaction history to identify any large, undocumented deposits. Lenders typically require explanations and documentation for any significant deposits to verify their source and legitimacy. Large deposits without a clear paper trail may raise concerns about undisclosed debts or loans, thus are not accepted.

Again it’s crucial for borrowers to maintain proper documentation and transparency regarding the source of their funds. Always encourage your buyers to consult with the loan officer managing the file before moving any large deposits into an account to ensure that the source and documentation of deposit is acceptable.

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