How Underwriters View Unsourced Funds In Mortgage Process

How Underwriters View Unsourced Funds In Mortgage Process

Gustan Cho Associates are mortgage brokers licensed in 48 states

This guide covers how underwriters view unsourced funds while analyzing and reviewing a borrower. Unsourced funds have no paper trail, so mortgage underwriters cannot source the funds needed for the mortgage asset qualification process.

Borrowers need to source the funds to use the funds towards the home buyer’s down payment or closing costs on a transaction.

Mortgage underwriters view unsourced funds, also known as “mystery funds” or “gift funds,” with caution. Underwriters view unsourced funds as raising concerns about the source of the money being used for the down payment, closing costs, or other expenses associated with a mortgage application.

The Role of the Underwriter in the Mortgage Process

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Mortgage underwriters are responsible for ensuring that the funds used to purchase a home are legitimate and not the result of fraud or money laundering. Mortgage underwriters typically view unsourced funds by scrutinizing consistent, inconsistent, irregular, and large deposit deposits.

Underwriters will typically require borrowers to provide documentation and proof of the source of any funds used for the down payment and closing costs.

If the mortgage underwriter sees any irregular or large deposits, the underwriter will need to the source of the funds. If the irregular or large funds shown in the bank statement cannot be adequately verified, it can raise red flags. Speak With Our Loan Officer for mortgage process

What Does a Mortgage Underwriter Check?

A mortgage underwriter plays a crucial role in the home loan approval process by assessing the risk of lending to a potential borrower. Here’s what they typically check:

  1. Credit Score and Credit History: This is one of the primary factors in determining the borrower’s financial reliability. A higher credit score suggests a lower risk to the lender.
  2. Income and Employment Verification: Underwriters review the borrower’s job stability and income sources. This includes checking employment history, salary, bonuses, and any other consistent income to ensure the borrower has the means to repay the loan.
  3. Debt-to-Income Ratio (DTI): This ratio measures the percentage of a borrower’s gross monthly income to pay debts. A lower DTI indicates more disposable income, reducing the lender’s risk.
  4. Asset Verification: Assets are important as they can be used for making the down payment, paying closing costs, or serving as financial reserves. Underwriters verify assets through bank statements and other records.
  5. Property Appraisal: The underwriter verifies that the appraisal provides sufficient collateral for the loan amount by meeting or exceeding the mortgage value.
  6. Loan-to-Value Ratio (LTV): The loan-to-value (LTV) ratio. A lower ratio indicates less risk, as the borrower has more equity. This is the loan-to-value (LTV) ratio. A lower ratio indicates less risk, as the borrower has more equity.
  7. Additional Documentation and Compliance: The underwriter ensures all the necessary documentation and that the loan meets all applicable laws and guidelines, including those set by the government or the mortgage lender.

By assessing these factors, mortgage underwriters evaluate the probability of the borrower’s ability to repay the loan, safeguarding the lender’s interests.

Do Mortgage Underwriters Check Bank Statements Before Closing

Mortgage lenders require 60 days of bank statements. Every deposit on the bank statements is looked at. Payroll deposits are easy to source. This is because it is a consistent deposit every week or every other week. Let’s take a case scenario of how underwriters check for irregular deposits. For example, say there is a large deposit of $1,000.

Every deposit greater than $200 needs to be sourced. Every irregular deposit is looked at and needs to be sourced.

The underwriter will question where that deposit came from. Underwriters will need a paper trail. For example, if the $1,000 deposit were a gambling profit, it would be considered unsourced funds. That $1,000 cannot be used toward the borrower’s down payment or closing costs. If the deposit was from the sale of a car, then the funds can be sourced by providing a copy of the check, bill of sale, copy of the title, and deposit slip.

What Do Mortgage Underwriters Look For in Bank Statements

Mortgage underwriters assess the overall risk of the loan, including the borrower’s ability to repay and the potential for fraud or misrepresentation.

Unsourced funds can increase the perceived risk of the loan, which may result in additional requirements or a higher interest rate.

Any inconsistencies or irregularities in the borrower’s financial documentation, such as sudden large deposits, undisclosed loans, or unexplained transfers, can raise concerns for underwriters. They may request additional documentation or explanations to address these issues. Click here to apply for a mortgage loan by fill-up form

Seasoning Requirements For Cash Deposits To Become Source Funds

Unsourced Funds

Underwriters may have seasoning requirements for funds, which means that the funds must be in the borrower’s account for a certain period before they can be used for the mortgage transaction. This helps ensure the funds are not a recent deposit from an undisclosed source.

Borrowers need to be transparent and honest with their mortgage lenders and underwriters about the source of their funds.

Attempting to hide or misrepresent the source of funds can lead to loan denial and legal consequences. Suppose you are using gift funds or have any unsourced funds. In that case, it’s advisable to work closely with your lender to ensure you meet all their documentation and verification requirements to avoid delays or complications in the mortgage approval process.

Cash Are Considered Unsourced Funds

Some folks feel safer having cash in a safe than parking at a bank. Unfortunately, cash is considered unsourced funds. They cannot be used as assets.  Cash is viewed as unsourced funds by mortgage lenders. Earnest money on a home purchase offer cannot be used if the funds are not sourced because cash is considered unsourced.

Sometimes, homebuyers go to their banks for money orders or cashier’s checks for earnest money funds. Earnest money cannot be used and counted towards the down payment.

Borrowers are typically required to provide bank statements for the past few months to show the history of their finances. Any large deposits or transfers that cannot be sourced or explained may be subject to additional scrutiny.

How Can Borrowers Use Gift Funds on a Home Purchase

If the unsourced funds are gifts from a family member or friend, mortgage underwriters generally require a gift letter signed by the donor and the borrower. The letter should state the nature of the gift and the amount and confirm that it is not a loan. The funds are solely a gift and do not need to be repaid.

The underwriter may also require 30 days of bank statements from the donor of the gift funds to prove the legitimacy of the gift.

Many people offer they will use gift funds for the down payment on a home purchase. Many homebuyers receive cash gifts from family members. Gift funds can be used towards the down payment and closing costs on a home purchased. Unsourced funds cannot be used.

Who Can Become a Donor For Gift Funds For Homebuyers

Gift funds must be sourced by providing a canceled check by the donor to the recipient.  Cash and unsourced funds do not exist in the mortgage industry.

The donor of gift funds must provide a 30-day bank statement showing that the gift funds have been placed in the donor’s account from the donor’s to the recipient’s bank account.

Donors need to complete and sign the letter provided by the lender. Anything before 60 days of bank statements does not need to be sourced. The donor of the gift funds also needs to sign a letter stating that the gift funds are not a loan and that the gift funds to the recipient do not have to be paid back to the donor.

Solution To Unsourced Funds

Borrowers with unsourced funds, such as mattress money, can eventually use those funds. If mattress money is the only source of cash to close, borrowers must deposit the unsourced funds in their bank account as soon as possible. Let the funds season for 60 days. Lenders only require 60 days of bank statements.

Any deposits past the 60-day mark will not need to be sourced. Remember that mortgage lenders will only require 60 days of bank statements.

Homebuyers or homeowners needing to qualify for a mortgage with a lender with no overlays on government and conforming loans can contact us at Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at Gustan Cho Associates has ZERO LENDER OVERLAYS on FHA, VA, USDA, and Conventional loans. Gustan Cho Associates are correspondent lenders on non-qm loans and bank statement loans for self-employed borrowers. Talk to our expert  for non-qm Loans

FAQs About How Underwriters View Unsourced Funds In Mortgage Process

  • What are unsourced funds? Unsourced funds, often called “mystery funds” or “gift funds,” are amounts deposited into a borrower’s account that lack a clear, traceable source or documentation. Mortgage underwriters view these funds with suspicion as they may raise concerns about the legality or the origin of the money used for down payments, closing costs, or other mortgage-related expenses.
  • Why are unsourced funds an issue in mortgage underwriting? Unsourced funds can indicate potential risks such as fraud or money laundering. Mortgage underwriters are responsible for ensuring that all funds used in a mortgage transaction are legitimate. They scrutinize unsourced funds to protect against these risks, as they could impact the lender’s decision on the loan approval.
  • How do mortgage underwriters handle large or irregular deposits? Mortgage underwriters require documentation for large or irregular deposits in a borrower’s bank statements. Each deposit over a certain threshold (commonly $200) must be adequately sourced with a paper trail. These funds must be verified to be eligible for use towards the down payment or closing costs.
  • What is required from borrowers when using gift funds for a home purchase? If using gift funds, borrowers must provide a gift letter from the donor that clarifies the nature of the gift, its amount, and a statement that it is not a loan and does not need to be repaid. Underwriters may also require additional documentation, such as bank statements from the donor, to verify the legitimacy of the gift.
  • What are the seasoning requirements for cash deposits to become sourced funds? Seasoning requirements stipulate that funds must have been in the borrower’s account for a specific period (often 60 days) before they can be used in a mortgage transaction. This ensures that the funds are not recent unsourced deposits.
  • Can cash be used as a source of funds in mortgage transactions? Cash is generally considered unsourced and cannot be used directly in mortgage transactions. Borrowers must deposit cash into a bank account and let it mature for the required period to meet underwriting guidelines. If cash deposits are to be used, they must be documented to show their origin.
  • What do underwriters look for in bank statements? Underwriters look for consistency and transparency in financial transactions. They assess bank statements for inconsistencies, unexplained large deposits, undisclosed loans, or other irregularities that could indicate financial instability or fraudulent activity.
  • How can borrowers ensure their funds are accepted by mortgage underwriters? Borrowers should maintain clear records of all transactions and deposits. All funds in a mortgage transaction should have a clear, documentable source. Transparency with lenders about the origin of funds and cooperation in providing necessary documentation can help ensure smooth mortgage application processing.
  • What happens if borrowers attempt to hide the source of funds? Misrepresenting or concealing the origin of funds can have serious consequences, including rejection of loan applications and possible legal action. Openness and honesty with lenders are essential for a successful mortgage approval process.

These FAQs explain how the mortgage underwriting process handles unsourced funds, emphasizing the importance of transparency and proper documentation in securing a home loan. Speak With Our Loan Officer for Conventional Loans

This blog about How Underwriters View Unsourced Funds In Mortgage Process was updated on May 2nd, 2024.

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  1. FHA is requiring I pay 100 thousand I owe in biz taxes. I have the money in cashiers checks but not in traceable funds in a bank acount for my business or personal accounts. I had a friend that was going to let me give him the 100 K and then write a check to IRS but he suddently got cold feet thinking it was not legal.

    1. Can you please elaborate your question. I do not quite understand your case scenario. Why is FHA requiring for you to pay $100,000? Are you in the middle of the mortgage process with a lender?

  2. Hi, I have a question. My dad and bro gave me $2,600 cash wedding gift. I deposited it a month later. I’m on the process of getting a mortgage they asked for bank statement from the donor’s gift fund. I cant provide bank statements from my bro and dad would this affect my loan from getting approved? I have enough money to cover closing cost without using that money.

    1. That is fine then. You do not have to provide bank statements of the donor if you are not going to use those funds.

  3. Hello,
    My aunt gave me a gift for my home purchase for $9000, but I cannot provide the statement to source these funds. I don’t need to use this money towards closing costs because I have enough funds in my account to cover closing without it. Will this affect my mortgage?

    1. You need a gift letter and proof of the canceled check on conventional loans. FHA loans require bank statements.

  4. My aunt used a cashier check when giving me the funds. Can I just give them the check without the bank statement?

    1. On conventional loans, you can just give the lender a copy of the canceled check. On FHA loans, you need to provide a gift letter, the donor’s bank statement, and your bank statements.

    1. On conventional loans, if you are using gift funds, all you need to provide is copy of canceled checks. Front and back.

    1. Yes, you do not have to provide bank statements or canceled checks if you are not using the gift funds.

  5. Thank you. I’m suppose to close next week. I’m scared thinking the underwriter is going to pull back my loan.

  6. I am trying to use some of the down payment from the proceeds from another property (it was free and clear). How long do I need to be on the deed in order to use the money? I already have 10% my own money,

      1. Bank is asking for a paper trail (bank statements) on funds used to payoff some open revolving credit cards (as a condition to close).
        I can see them asking for that on any funds used for the purchase of the property, but wanting a paper trail for funds used to pay off preexisting established lines of credit seems like overkill.

        If I win the $50k in the lotto and decide to use those funds to pay off all my bills, they shouldn’t need me to source that.

        PS: I’ve already provided the bank with IRA and bank statements showing I have sufficient funds to close, plus extra funds to pay off those credit cards. How I eventually decide to pay off those credit cards before closing s/b my prerogative. Yes?

        1. You are correct. You must have a new inexperienced underwriter. Have your loan officer to contact the underwriting manager.

  7. I unintentionally paid my $1k emd with a postal money order that I paid for in cash and sent it priority mail right then and there. I did not know I had to withdraw the funds from my bank for it to be sourced until today when I received and email from my financing agent requesting a copy of the check and a bank statement showing it being pulled from my account. I contacted my LO to see what we can do to rectify the situation but he said he has to wait till Tuesday to speak to the financing agent. Is there any way to resolve this? Will financing allow me to correct my mistake by sending a cashier’s check expedited in place for the one I previously sent

    1. The cashier’s check will not count. You need to show that the earnest money check has been sourced by showing it was verified funds in your checking account. You have the sellers send you back the earnest money check and send them another $1,000 from sourced funds.

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