How Underwriters View Unsourced Funds In Mortgage Process

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.

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.

The Role of the Underwriter in the Mortgage Process

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.

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.

Seasoning Requirements For Cash Deposits To Become Source 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 gcho@gustancho.com. 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.