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Large deposits into your accounts are usually a reason to celebrate. But while you’re waiting for mortgage loan approval, those funds can lead the loan underwriter to deny your mortgage loan unless you prove the deposit is legitimate.
Don’t worry. We’ll explain what constitutes a “large deposit” and when your lender may question it. We’ll also cover how to substantiate the deposit’s validity and why you should tell your lender if you’re expecting one of these windfalls.
What is a large deposit?
A “large deposit” is any out-of-the-norm amount of money you deposit into your checking, savings, or other asset accounts.
An asset account is any place where you have funds available to you, including CDs, money market, retirement, and brokerage accounts.
Depending on the source of these large deposits, they may or may not concern your lender. For example, income from your regular employer like your salary or an IRS tax refund won’t draw any attention. Your bank statement will clearly show the reference for these deposits. There’s no question about their legitimacy.
But if someone repays you for a personal loan, your lender will likely ask for proof of who gave you the money. The same applies if you sell your car and deposit that amount in your checking account.
Why do lenders care about large deposits in my account?
A loan underwriter evaluates your credit history and ability to repay the loan to confirm that you qualify. They also evaluate the home’s value compared to the loan amount. They also make sure that your loan application follows the “rules” for the specific loan type you’re applying for.
An unexplained deposit can threaten your loan qualification, especially if you can’t establish where those funds originated. Wherever the large deposit came from, you’ll need to prove the source.
Some common reasons why an underwriter may flag a large bank deposit include to confirm:
- You didn’t take out a new loan or debt. Your loan application must include those new loan payments. You’ll need to qualify for the loan with the new debt payment incorporated into your debt-to-income ratio.
- You have additional income. You need to account for all income when applying for a loan, even if it’s from a side gig.
- You acquired the funds from an acceptable source. The money can’t come from someone who will benefit from the transaction like the home seller or real estate agent.
- You received the money as a down payment gift. Depending on the type of loan you applied for, certain rules apply. Most loan types allow gifts for a home you’ll live in, but conventional loans don’t allow them on an investment property.
How to explain large cash deposits during the mortgage process
It all comes down to documentation. Every loan underwriter may ask for different types of documentation. You should have some documents ready in case the underwriter requests them, including:
- The cancelled check that was deposited
- A letter from the person who gave you the money explaining why, especially if it’s a down payment gift
- A third-party estimate of the item’s value, such as the Kelley Blue Book value for a vehicle
- A copy of the ad you placed to sell a big-ticket item like a car
The most difficult type of deposit to verify is “mattress money.” This is cash on hand in your home that you never deposited in your checking or savings account. Proving the source of this type of money is difficult. If you don’t need this cash for the purchase, wait until after closing to deposit it. Lenders often ask for updated bank statements right before closing. If you do need it, “season” the funds by depositing them at least two months before you apply. Or tell your lender up front. FHA, for example, lets lenders accept cash on hand if you can explain how you saved it and how long it took.
What is seasoned money?
Seasoned money is money you have kept in your checking or savings account for at least 60 days. In general, lenders require your past two months’ bank statements during your loan application. All listed deposits need to come from an identifiable source. Two months is also enough time for any new open account or loan to show up on your credit report.
Lenders aren’t concerned with any large deposit into your checking or savings account older than 60 days. So, if you want to make a large deposit, then apply for your loan two months after. Lenders consider that money “seasoned” and won’t ask about it.
When do lenders consider deposits large?
There’s no simple formula to determine how much money a lender will consider a large deposit. Loan underwriters look at your overall financial situation. If you make $100,000 per year and have a ton of cash saved, then the underwriter may not ask about a $500 deposit. But if you have just enough in your checking account to cover the down payment, expect the lender to ask about any unidentifiable deposits. This applies even to deposits as low as $100.
“The size of the bank deposit is only a concern if it’s out of the ordinary for that account,” says Eric Jeanette, a mortgage professional since 2002 and founder of Dream Home Financing and FHA Lenders. “For example, a $10,000 deposit may raise an underwriter’s eyebrow if the account only has a $12,000 balance and the previous activity was minimal,” explains Jeanette. “But that same deposit won’t get a second look if the account balance was high and there have been similar transactions over time.”
Fannie Mae and FHA both treat a single deposit of more than 50% of your total monthly income as a “large deposit.” Your lender may still ask about smaller deposits that look unusual.
It’s also important to keep your accounts stable after you’ve applied and before you’re approved. “If the loan application process gets delayed, the lender may ask for another bank statement or more pay stubs,” says Jeanette. “If you have a large deposit or have depleted your funds, your loan approval may have problems.”
What to do if your bank statement shows a large deposit?
If you have a large deposit on your previous two months’ bank statements, make sure it’s from an eligible source that you can prove. Your lender is going to ask about it. If the money is from a loan, then be upfront with your lender and don’t attempt to hide it. That’s fraud and your lender is going to uncover the loan anyway.
For a deposit that’s hard to document, consider seasoning the money. That way your lender won’t ask about it. With some pre-planning, you’ll ensure that large deposits won’t negatively impact your home purchase or refinance loan application.
A final note on large deposits
Consider your finances ahead of applying for your mortgage loan. Be proactive about securing any documentation you may need. Review your accounts like a loan underwriter and be critical. Any questionable deposit may delay the closing of your loan or even risk denial. That could cost you in fees and contract extensions and potentially higher interest rates for your loan. When in doubt, speak to your loan officer.
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