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Your Bank Account Under a Microscope
Loan Approved: Tips to Avoid Delays
Since the mortgage industry was turned upside down and the feds jumped in with tighter regulations governing home loans; mortgage lenders are required by law to verify all funds used for these loans.
All federally regulated financial institutions offering loans are required to comply with certain standards of review. This is to protect against bank fraud, money laundering, and terrorist activity.
An important part of the new regulations is verifying assets and funds to close. For compliance purposes lenders need to follow all the rules regarding verifying assets. This means underwriters will need to review your financial statements that must be provided by the institutions holding your assets.
All Eyes on Deck-What Underwriters Focus On
The sophisticated computers we have today make lenders picky regarding asset statements. They’re concerned about format, origin, and the type of information on statements. To avoid delays, it’s critical to follow instructions you’re given regarding providing information.
One of the key areas the underwriters focus on are deposits and they’ll be looking for “overdrafts” due to insufficient funds.
The asset statements list all deposits in your account. Generally speaking, borrowers have two types of deposits – Income from employment and Other.
Any funds intended for down payment and closing costs must be verified. In other words, a paper trail. If there’s no trail, the money can’t be considered “acceptable” for closing.
Income Deposits: Most deposits come from earned income. Direct deposits are common in checking or savings accounts. This type of deposit makes it easy for underwriters to verify against pay stubs. Also, it’s easy to see deposits transferred between business and personal accounts if self-employed.
Other Deposits: Other deposits can come from anywhere. Such as gifts, repayments from loans, tax refunds, insurance settlements, etc. Verifying these funds generally cause the greatest problems for borrowers.
It’s Just Part of the Job
No, they’re not nosy underwriters it’s the job. As part of their due diligence, underwriters need to make sure the funds are truly yours. And, that they came from an acceptable source. Also, that these funds won’t affect your ability to repay the loan.
In addition, underwriters need to confirm funds aren’t coming from another interested party. For example, the seller, who has a financial interest in the transaction.
An unexplained deposit could indicate a new loan or a cash advance. This could affect the borrower’s monthly debt obligations. If a new loan was advanced, the new payment must be considered in debt ratios. Some loan programs don’t allow loans for any portion of a down payment.
Prepare to Prove It
Your lender may ask for proof that a large deposit is not a loan. A canceled check will be required. Along with an explanation of the source of those funds. You’ll need documentation that backs-up the source.
In addition, expect to get a letter from anyone who gave you money for any reason. If you sold a big-ticket item such as a car, you’ll need the ad you used to sell it. As well as the bill of sale. You also may need a third-party estimate of value, such as Kelly Blue Book value of a vehicle.
If your employer doesn’t use direct deposit, but pays with a physical check, hang on to all pay stubs. You will likely have to submit every pay stub that’s been deposited into your account. These deposits will be reflected on the bank statements you provide.
Cash is practically impossible to prove. Cash saved in a safety deposit box, drawer, or under your mattress are simply not acceptable. Ask your loan professional before depositing any cash into your checking or savings account. Borrowers are typically better off using saved cash for daily expenses. Cash deposited 60 days prior to any review may be okay. Typically, lenders are looking at “recent” deposits. Call your loan professional for more details about using cash.
Large Deposits – Don’t Try to Hide Them
If you already have a large deposit on your bank statement, make sure it’s from an eligible source. If it’s a loan, be up front about it. Don’t try to hide it. That’s fraud, and your lender will probably discover it anyway.
If you have a deposit that’s above-board but hard to document, ask your loan officer if you qualify for the loan without showing that bank statement. Or wait until your bank issues a newer statement. Then you can remove older statements that show large deposits.
Of course, refraining from making hard to document large deposits is the best way to avoid hassles. Especially, in the months prior to your loan application. The lender will assume any undocumented large deposit is from an ineligible source, and can deny your loan because of it.
With a little foresight and planning, you’ll avoid big headaches and ensure your home purchase or refinance application goes smoothly.
If you’re thinking about buying or selling a home, give me a call. We’ll have a quick visit, no pressure. I’ll answer questions and maybe offer some suggestions. Hopefully, then you’ll feel better about what to expect.