This Blog On Verified Funds For Home Closing Prior To Clear To Close Was UPDATED And PUBLISHED On March 16th, 2020
Failure To Provide Verified Funds For Home Closing Prior To Clear To Close is one of the most common obstacles during the mortgage process:
- It is s one of the many reasons why a clear to close is delayed on 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 home closing early in the mortgage process can delay the mortgage process and many times underwriters issuing clear to close
Lenders are required to abide by anti-money laundering rules and regulations. All funds for the down payment, reserves, and closing costs need to be sourced and verified. In this article, we will discuss and cover Verified Funds For Home Closing Prior To Clear To Close.
What Is Acceptable As Verified Funds For Home Closing
Here is what lenders are required by 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 in order 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
- May even delay the closing
- Large and irregular deposits need the source of the irregular and large deposits
Also, need a detailed letter of explanation as well as 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 need to be sourced.
- Irregular and large deposits that have been seasoned longer than 60 day does not matter
- Sourcing and/or letter of explanations are not required on deposits older than the 60 days prior
Examples of sourced verifiable funds in the past 60 days in a bank statement are the following:
- Regular direct deposits that are payroll checks
- Direct deposits that are child support and alimony payments
- Child support and alimony paperwork needs to be provided
- Any direct deposits from the IRS
- Proof of the funds receivables by the IRS needs to be provided as well as the letter of explanation
- Any deposits from second jobs or part-time jobs are considered sourced deposits
- Can be used as verifiable funds
- This holds true as long as documentation such as a letter of explanation, letter by the employer, proof of employment, copies of checks, and deposit slips are provided
- Any large deposits that come 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 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 and/or irregular deposit that is equal and/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 season in their bank account for at least sixty days
This is because any deposits that are within 60 days, documentation and sourcing will be required 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 and/or closing
- HUD allows that 100% of the down payment can be gifted
- However, gift funds are not viewed as favorable
Here are the rules with gift funds:
- FHA allows for 100% of the down payment to be gifted
- Fannie Mae and Freddie Mac does allow gift funds for down payment and reserve
- But only a portion of the down payment can be gifted and not 100%
- The donor of the gift needs to sign a gift letter that is provided by the lender
- Gift letter needs to state 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 donors’ bank statement
- Automated Underwriting System does not view gift funds favorably
Many times, AUS may require that down payment cannot be gifted for borrowers with lower credit scores or higher debt to income ratios or poor credit history or little to no credit tradelines.
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
- Will not use any bank accounts they do not need
- This holds true as long as 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 to use for the down payment and closing costs in a bank account that has 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
Here are potential issues with bank statements with overdrafts:
- Borrowers are required to provide 60 days bank statements
- Loan officers and/or mortgage processors will carefully review the 60 days bank statements for any irregular deposits/large deposits as well as overdrafts
- If the borrower provides 60 days of bank statements but there are no overdrafts, the loan officer should check to see if there are any year-to-date overdraft fees
- If there are, this will create a red flag and the actual 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, have the teller sign, date, and stamp it
The reason for the above is that bank statement printouts do not have year-to-date overdraft fees and 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 a bunch of bank overdrafts in the past 60 days, that bank 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 on 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, and 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 possibly 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
- Regardless, 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
Homebuyers interested in getting qualified for a home loan and are short in cash or do not have verified funds and have more questions about seasoned funds for home closing, please contact us at Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at firstname.lastname@example.org. We are available 7 days a week, evenings, weekends, and holidays to take your calls or email inquiry and answer any questions you may have.
March 16, 2020 - 6 min read