This guide covers verified funds for home closing before clear-to-close. Failure to provide verified funds for home closing before clear-to-close is one of the most common obstacles during the mortgage process. It is one of the many reasons a clear-to-close is delayed at the eleventh hour.
Mortgage underwriters have specific rules on whether they will allow or not allow cash on hand to be used as verified funds for home closing.
Failure to provide verified funds for a home closing early in the mortgage process can delay the mortgage process, and often, underwriters issue clear-to-close. Lenders are required to abide by anti-money laundering rules and regulations.
What Is Verified Funds For Home Closing
Verified funds for home closing typically refer to funds confirmed by the financial institution as being available and legitimate. When you’re involved in a real estate transaction, especially during the closing process, you may be required to provide funds to cover costs such as down payments, closing costs, and escrow accounts. All funds for the down payment, reserves, and closing costs must be sourced and verified. This article will discuss and cover verified funds for home closing before clear-to-close.
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Why Are Verified Funds For Home Closing Important
In this section, we will discuss why verified funds for home closing is important. We will detail why verified funds are important in home closing.
Verified funds provide assurance to the seller and other parties involved in the transaction that the money is available and will be honored.
This helps in avoiding any last-minute issues or delays. Real estate transactions involve significant sums of money, and fraud is a concern. Requiring verified funds minimizes the risk of fraudulent payments or bounced checks. Real estate transactions are often subject to specific regulations, and using verified funds ensures compliance. For example, some transactions may require a cashier’s check or a wire transfer.
Common Types of Verified Funds For Home Closing
Cashier checks are checks issued by a bank and drawn on the bank’s funds, providing a higher level of security than personal checks. Wire transfer money is electronically transferred from one bank account to another, ensuring immediate and secure funds.
Similar to cashier’s checks, certified checks are issued by a bank, but they are drawn on the customer’s account and certified by the bank.
It’s crucial to check with your real estate agent, attorney, or the closing agent involved in the transaction to understand the specific requirements for verified funds in your home closing. They will provide guidance on the acceptable forms of payment and any other details you need to know to ensure a smooth and successful closing process.
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What Is Acceptable as Verified Funds For Home Closing
In this section, we will cover what lenders require for borrowers. Lenders will require 60 days of bank statements. Any irregular or large deposits in a borrower’s bank statement in the past 60 days will need to be sourced for it to be used for the down payment, closing costs, or reserves for a home purchase.
Failure to provide verified funds for home closing during the early phases of the mortgage process will likely cause delays in the overall mortgage process.
It may even delay the closing. Large and irregular deposits need the source of the irregular and large deposits. Also, we need a detailed letter of explanation and documentation of the irregular and large deposits.
What Are Examples of Seasoned Funds and Sourced Deposits
All irregular and large deposits in a borrower’s bank statement in the past 60 days must be sourced. Irregular and large deposits seasoned longer than 60 days do not matter. Sourcing or a letter of explanation is not required on deposits older than 60 days prior. The following are examples of sourced verifiable funds in a bank statement in the past 60 days.
Regular direct deposits are payroll checks. Direct deposits are child support and alimony payments. Child support and alimony paperwork need to be provided—any direct deposits from the IRS.
Proof of the fund’s receivables by the IRS needs to be provided, as well as a letter of explanation. Any deposits from second jobs or part-time jobs are considered sourced deposits. They can be used as verifiable funds. This holds true as long as documentation such as a letter of explanation, a letter by the employer, proof of employment, copies of checks, and deposit slips are provided.
Large and Irregular Deposits
Any large deposits from a sale of goods, such as a vehicle, can be used as sourced verified deposits and verifiable funds. This only holds true as long as the copy of the check, copy of the deposit slip, title to the vehicle, letter of explanation, and copy of the bill of sale is provided to the mortgage underwriter.
A large deposit is defined as any large or irregular deposit equal to or greater than 10% of the borrower’s monthly household gross income.
If a borrower has undocumented cash, such as mattress cash, that cannot be sourced, it is recommended that they deposit those funds in their bank account way ahead of time. Let those funds remain in their bank account for at least sixty days. This is because documentation and sourcing will be required for any deposits within 60 days, and there is no way of getting away from that.
Gift Funds For Down Payment and Closing Costs
Gift Funds can be used for the down payment on a home purchase and closing costs but not for reserves. Gift funds can be gifted either during the mortgage process or closing. HUD allows 100% of the down payment to be gifted. However, gift funds are not viewed as favorable.
If you have multiple overdrafts on bank statements, you should not turn in those bank statements unless the loan officer says otherwise.
Some lenders like myself are very lenient with overdrafts. A detailed letter of explanation will solve the issue. While other lenders, even a 10-dollar overdraft will be a deal killer. AUS may often require that a down payment cannot be gifted to borrowers with lower credit scores, higher debt-to-income ratios, poor credit history, or little to no credit tradelines.
Mortgage Guidelines of Gift Funds
In this section, we will cover the rules of gift funds. HUD allows for 100% of the down payment to be gifted. Fannie Mae and Freddie Mac allow gift funds for down payment and reserves. But only a portion of the down payment can be gifted, not 100%.
The donor of the gift needs to sign a gift letter that the lender provides. The gift letter needs to state that the gift is only a gift. Will not be paid back to the donor.
30 days of bank statement by the donor needs to be provided showing that the gift funds have been seasoned for at least 30 days in the donor’s bank statement. Automated Underwriting System does not view gift funds favorably.
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Sourced Funds In Bank Accounts With Overdrafts
Overdrafts in bank accounts are viewed extremely negatively by mortgage underwriters. Many mortgage underwriters will automatically deny a mortgage loan if the borrower has any overdrafts in their bank accounts. Many borrowers have multiple bank accounts.
Experienced loan officers will carefully review all bank account statements. They will not use any bank accounts they do not need.
This holds true if they have one or two bank accounts with enough sourced funds for the down payment and closing costs. However, there are cases where borrowers have their sourced funds for the down payment and closing costs in a bank account with multiple overdrafts. This can create a problem. However, there are solutions that a sharp loan officer can come up with.
Issues With Bank Statements With Overdrafts
This section will cover the potential issues with bank statements with overdrafts. Borrowers are required to provide 60 days bank statements. Loan officers or mortgage processors will carefully review the 60-day bank statements for irregular deposits/large deposits and overdrafts.
If the borrower provides 60 days of bank statements but no overdrafts, the loan officer should check for any year-to-date overdraft fees.
If there are, this will create a red flag, and the bank statement should not be submitted. The borrower should go to their bank and ask the teller for 60 days of bank statement printouts, all pages including blank pages, and have the teller sign, date, and stamp it. The reason is that bank statement printouts do not have year-to-date overdraft fees, but actual bank statements do.
Verified Funds For Home Closing and Solutions For Borrowers With Overdrafts on Bank Statements
If the sourced funds are in a bank account with bank overdrafts in the past 60 days, that account should not be used. If the main borrower has a spouse, relative, or very close friend with funds in their bank account, see if they can add you as a joint bank account holder on their bank account.
Once you have added your name, get a 60-day bank statement printout from the bank teller. Have the teller date, sign, stamp it, and use that bank account printout as your bank statement.
Since you are now an instant joint account holder on another bank account, have the main bank account holder get you a letter of explanation stating that you have full access to their bank account. This can solve the overdraft issue you have. If your lender insists on the actual bank statement and will not accept the bank statement printout, then you may have to get gift funds. Or wait 60 days until bank overdrafts no longer appear on bank statements.
Getting Approved For a Mortgage With No Overlays
Homebuyers interested in qualifying for a home loan, short in cash, do not have verified funds, and have more questions about seasoned funds for home closing, please get in touch with us at Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com. We are available seven days a week, evenings, weekends, and holidays to answer your calls or email inquiries and answer any questions.
