Residential mortgages are subject to strict financial regulations. Nowhere throughout the loan process is this more true than when it comes to sourcing the down payment funds needed for closing. The amount of documentation required for this aspect of the loan can be incredibly frustrating and time-consuming for all parties involved. If not properly prepared, sourcing your funds for closing can turn into a nightmare and could ultimately prevent you from obtaining your loan.
The reason why sourcing funds for closing requires a lot of documentation is due to the passing of The Patriot Act in 2001. The Patriot Act is an anti-money laundering regulation that requires institutions to provide transparency for large financial transactions. Prior to the passing of this legislation, real estate was a way for criminals to launder money. While this law has scrutinized the amount of money laundering, many law-abiding citizens seeking a mortgage have been caught in the crosshairs as well causing pain and headaches.
The easiest way for sourcing closing funds is to have all of the funds being used for the transaction placed into a checking or savings bank account well in advance (preferably 60 days before entering into escrow). If you are unable to make this happen, it is incredibly important that you talk with your mortgage loan originator in advance and develop a clear plan to determine where the down payment proceeds will originate from.
Current underwriting guidelines require a 60 transaction history for all accounts that are being used for closing funds. Most importantly there can be no gaps in the 60 days. Depending on your close of escrow date, bank transaction summaries are often required in addition to regular bank statements. Furthermore, any deposits that are considered large or unusual during this period will need to have supporting documentation to prove that they are coming from legitimate sources. A deposit is typically flagged and considered large when it is over half of your monthly qualifying income.
In most cases, the borrower is also required to be able to provide evidence that all closing funds for the translation are liquid. This means that any funds that you are planning to use for closing that are currently being sourced from stock or bond sales must be sold beforehand. We typically recommend that all closing funds be sold/liquidated at least 10-15 days before closing to ensure there are no delays.
Further complicating documenting closing funds is the fact that statements and transaction summaries from banking institutions look different across the board. When providing documentation, it is crucial that ensure that there are sufficient identifying factors on each statement such as your account #, name, etc. Sending screenshots or Excel sheets of bank account statements often will not suffice for proper documentation. We always recommend saving or printing the page as a PDF as more often than not this will have the information required.
In conclusion, as long as you are prepared in advance sourcing closing funds should not be an issue. Like many things, it becomes painful when you are scrambling at the last minute. Please try to avoid becoming frustrated or yelling at your loan officer if they request additional documentation for closing funds. If you have any questions or concerns give us a call at (760) 930-0569 and our staff will be happy to answer questions.