Common sense says that every penny you can show in a bank account helps you qualify for a mortgage.
But sometimes the opposite is true. Depositing money into an account from a sold car or from that jar under your bed can actually sink your chances of being approved for your home purchase or refinance.
Most home loan applicants inadvertently have a large deposit showing on the bank statement they give to their lender. But few expect the hassle that awaits them when their lender asks them to prove where it came from.
What Is a Large Deposit?
A “large deposit” is any significant addition of money via cash, checks, or electronic transfer into your checking, savings, or other asset account.
But not all large deposits are created equal. The lender won’t ask for more documentation on deposits from obvious sources, such as income from your employer or an IRS tax refund. Your bank statement will clearly show the source of the deposit, such as “Direct Deposit: ABC Warehouse.”
But if your brother paid back the $1,000 you lent him for last winter’s ski trip, your bank statement will state something like “ATM Deposit.” Your lender will require proof of the source.
Why Do Lenders Care What I Deposit Into My Own Account?
It’s not that your underwriter is particularly nosy. As part of their due diligence, underwriters make sure you didn’t open another credit account that jeopardizes your loan qualification. An unexplained deposit can indicate that you opened a loan or took a cash advance and deposited the proceeds into your account.
There may be strings attached to this newly-deposited money. If you opened a new loan or credit account, there will be a monthly payment associated with it. You’ll need to qualify for the mortgage with that payment included in your debt ratios. And some loan programs don’t allow you to borrow any portion of the down payment.
Prepare to Prove It
Your lender may ask for a number of things to prove that your large deposit is not a loan. A canceled check will be required. In addition, expect to get a letter from anyone who gave you money for any reason. If you sold a big-ticket item such as a car, you’ll need the ad you used to sell it, as well as the report of sale. You also may need a third party estimate of value, such as a Kelly Blue Book value of a vehicle.
If your employer doesn’t use direct deposit, but pays you with a physical check, hang on to all of your pay stubs. You’ll most likely have to provide every pay stub that’s been deposited into the bank statements you provide to the lender.
The hardest type of deposit to prove is “mattress money,” i.e. cash on hand that was never deposited into a checking or savings account. Think twice and ask your loan professional before depositing any amount of cash. If your lender allows “mattress money” at all (which it may not), expect to jump through very tight hoops to prove its source.
How Much Can I Deposit?
There’s no simple answer to how much the lender will consider a large deposit. Underwriters look at your overall financial situation. If you make $100,000 per year and have a ton of cash saved, 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 questionable deposits, even down to $100 or less.
What to Do if Your Bank Statement Shows a Large Deposit
If you already have a large deposit on your bank statement, make sure it’s from an eligible source. If it is a loan, be up front about it. Don’t try to hide it. That’s fraud, and your lender will probably discover it anyway.
If you have a deposit that’s above-board but hard to document, ask your loan officer if you qualify for the loan without showing that particular bank statement. Or wait until your bank issues a newer statement and remove older statements that show large deposits.
Of course, the best way to avoid hassling with a large deposit is to refrain from putting any hard-to-document funds into any accounts in the months prior to your loan application. The lender will assume that any undocumented large deposit is from an ineligible source, and can deny your loan because of it.
With a little foresight and planning, you’ll save yourself a big headache and ensure your home purchase or refinance application meets smooth sailing.