When applying for a mortgage, mortgage lenders will look at a variety of factors and financial documents, but one of the items that most people don’t think about is large deposits into their bank account and their need to document them.
When a lender reviews credit history and financial situation for mortgage approval, they’re trying to answer a few specific questions:
- Does the borrower have a history that demonstrates they are likely to pay back a mortgage loan as agreed?
- Does the lender have the funds to afford the loan you want to take out?
- Does the loan application and situation comply with any special rules for the loan type?
Mortgage lenders are required by Federal law to make sure that the borrower’s income, along with any additional assets, are legitimate. Real estate has long been used as a means for money laundering so mortgage lenders must verify any large deposits into your bank account to ensure they are legal and not a loan or other debt obligation.
If there is a recent, large and unusual deposit in your bank account, it could give a mortgage lender a reason to pause and ask additional questions. They may want to know where the money came from and document how you obtained it so they can adjust mortgage calculations if necessary.
A good rule of thumb is to consider any deposit that is more than 50% of your usual monthly income a “large deposit.” For example, if a borrower is earning about $10,000 per month and there is a deposit of $5,000, the mortgage lender likely won’t question a deposit of that amount.
Another example, is if a borrower is earning about $4,000 per month and they suddenly receive a $5,000 deposit into their primary checking account, the lender will likely require an explanation.
It is also important to keep bank accounts stable after you’ve applied and before the mortgage loan is closed. If you are expecting a large windfall of funds soon, let your loan officer know immediately and they can assist you with what documents will be needed to paper trail it.
How to Explain a Cash Deposit for a Mortgage
If you’re asked to explain your cash deposits for a mortgage, make sure you’re honest and clear about where the cash came from. If a mortgage lender is asking for proof of deposit, you might need:
- Copies of checks, receipts or contracts related to the transaction, especially if you earned the money via a side gig or freelancing.
- A gift letter stating that the money is a gift and you do not have to pay it back.
- Documentation of a loan or grant, particularly if it’s part of an approved program for assisting with down payments.
Know that the source of the deposit could disqualify mortgage approval. For example, if you take out a personal loan for your down payment, you’ve added another monthly payment to your budget. The mortgage lender would need to go through the approval process again with this debt in mind.
If you have any questions about what constitutes a large cash deposit, please reach out to us at (760) 930-0569 and one of our loan officers will be happy to help.