Large deposits and sourcing funds: what lenders ask and why

What counts as a large deposit

Fannie Mae's Selling Guide sets a clear test. A large deposit is a single deposit that exceeds 50 percent of the total monthly qualifying income for the loan. When the lender uses bank statements, typically covering the most recent two months, it must evaluate any large deposit.

Only the unsourced part counts. If part of a deposit is documented, for example as a tax refund, the lender subtracts that part before applying the 50 percent test.

Why lenders ask

The concern is hidden debt. If a relative lent you money, you owe a monthly payment the lender has not counted. Fannie Mae requires that if funds from a large deposit are needed for the down payment, closing costs or reserves, the lender must document that they came from an acceptable source.

If the money is not needed to close, the lender can sometimes set the deposit aside and use only your other verified funds.

Documents that explain a deposit

Fannie Mae lists examples of acceptable documentation: your written explanation, proof that you owned an asset and sold it, or a copy of a wedding invitation to support gift funds received at a wedding. In practice, lenders often ask for:

• Sale of an item. A bill of sale and proof of ownership, such as a title.
• Gift. A signed gift letter and proof of the transfer from the donor's account.
• Transfer between your own accounts. Statements for both accounts.
• Refunds and bonuses. A tax refund notice or pay stub showing the bonus.

If documentation is incomplete, Fannie Mae allows the lender to use reasonable judgment based on your debt-to-income ratio, income and credit, and to write down its reasoning. Do not count on that. Clear documents are faster.

FHA's rules on funds and cash

HUD's Handbook 4000.1 requires FHA lenders to document all funds used to qualify for or close a loan. Cash you have saved at home can be used only after it is deposited in a financial institution or held by the escrow or title company. You must explain how you accumulated it and how long it took, and the lender checks whether that is reasonable given your income, spending, expenses and history of using banks. Gifts must meet HUD's donor rules, and cash on hand is not an acceptable source for a donor's gift.

Preparing before you apply

Season your money. Deposits from months ago are less likely to fall in the statements a lender reviews.

Keep transfers simple. Moving money in and out of several accounts creates many lines to explain.

Talk first. Tell your loan officer about gifts, asset sales or bonuses before the money arrives, so you know what paperwork to keep.

Never disguise a loan as a gift. Misstating the source of funds on a mortgage application is serious. If a relative is lending you money, tell the lender.

The bottom line

Fannie Mae treats an unsourced single deposit over 50 percent of your monthly qualifying income as large, and the money must be documented if you need it to close. FHA requires all closing funds to be documented. Gather proof for every unusual deposit, avoid cash you cannot trace, and talk to your lender before money moves.