Cash To Close And Seasoned Funds For Closing Mortgage Guidelines
This Blog On Cash To Close And Seasoned Funds For Closing Mortgage Guidelines Was UPDATED And PUBLISHED On December 30tth and Written by Gustan Cho NMLS 873293
Many borrowers have a hard time understanding cash to close for closing.
- Most folks and the regular traditional business world would think that cash is definitely king when it come to purchasing any consumer goods and even high ticket items including a home
- Unfortunately, undocumented funds and cash on hand are not allowed when qualifying for a mortgage loan
- Seasoned Funds for closing all need to be documented
- Loan officers and mortgage processors need to make sure that the borrower has enough cash to close for closing in the earlier stages of the mortgage process
- Cannot wait until the last minute, especially if the borrower does not have any family members that can gift them the money
In this article, we will cover cash to close as well as seasoned funds required for a home closing.
How Lenders Source And Determine Cash To Close And Seasoned Funds For Closing
As mentioned earlier, all funds in the mortgage transaction processed will require documentation as of where the funds came from.
For example, here is a case scenario:
- if the borrower is getting a $1,000 direct deposit every other week from his employer
- this will be considered verified funds
- these funds can be used for cash to close and seasoned funds for closing
However, if a borrower were to deposit cash from his side job, those funds cannot be used for cash to close and seasoned funds for closing:
- Cash in the mortgage business cannot be used as verified funds
- Any irregular deposits that is over $100 dollars needs to be explained and the source of the deposit needs to be provided to the mortgage underwriter
For example, here is a case scenario:
- if there as an irregular deposit of $2,000
- the underwriter will need to know where that money came from
- If it came from an income tax refund, then documentation from the IRS and deposit slip
A letter of explanation needs to be provided in order for that $2,000 deposit to be able to be used for cash to close and seasoned funds for closing.
How Long Do Funds Need To Be Sourced?
There are instances where borrowers cannot source their deposits and this creates a big problem.
- The good news is that borrowers who have substantial cash deposits and cannot be sourced and cannot be used for cash to close and seasoned funds for closing can wait 60 days from the date of their last unsourced deposit and underwriters will not question it
- Lenders require 60 days of bank statements and only the transactions from the 60 days of their bank statements are scrutinized
- Anything prior to the 60 days is not questioned and are considered verified sourced funds and can be used for cash to close and seasoned funds for closing
- There are still folks who do not trust banks and have cash in a safe deposit box at their local bank or cash on hand in their homes
- Unfortunately, cash cannot be used as verified sourced funds
So the only solution is to make the cash deposit in their bank account and wait 60 days for the funds to seasoned in order for those funds to be counted as verified funds.
What Are Large Deposits?
Under the view of lenders, large deposits are deposits that are equal to or greater than 10% of the monthly gross household income of the borrower.
- Large deposits need to be sourced to be able to be used for cash to close and seasoned funds for closing
- Those who are planning on buying a home in the near future, deposit any and all unsourced funds and cash as soon as possible and let those funds season 60 days in the bank account
So sourcing those deposits will not become an issue when you are ready to apply for a mortgage loan.
Gift Funds As Cash To Close And Seasoned Funds For Closing
Gift Funds can be used for cash to close and seasoned funds for closing.
- The donor needs to sign a gift letter provided by the lender which states that the funds gifted to the home buyers is a gift and not a loan and that the gift funds will not be paid back to the donor
- The borrower needs to make a copy of the check received by the donor and provide copies of the deposit slip as well as an update bank statement after the deposit of the check from the donor of the gift funds
- The donor needs to provide 30 days of bank statements showing that the gift funds have been seasoned for at least 30 days
- It needs to show gifted funds being withdrawn from their account and deposited to the home buyer’s bank account
Gift Funds are not viewed favorably by lenders as well as the Automated Underwriting Systems. Many times, DU/LP AUS will get you a referred/eligible per DU FINDINGS and LP FINDINGS with gift funds for the down payment. However, if gift funds are removed and say it is the borrower’s own funds, it will render an approve/eligible. Gift Funds can be used for the down payment and closing costs. Gift Funds cannot be used for reserves. Reserves need to be borrower’s own funds.