I mentioned yesterday how “unexplained deposits” on bank and investment accounts often create problems when transactions are in escrow.
This is b/c lenders want to make sure all funds going toward a down payment are “seasoned.”
“Seasoned” means that the funds have been in a borrower’s bank account for over two months and/or that the funds came from a legitimate source.
Lenders want to make sure funds are seasoned for several reasons: (1) to make sure buyers did not secretly borrow down payment funds that have to be paid back (impacting debt ratios); (2) to make sure buyers have “skin in the game” with their own funds going towards the down payment; and/or (3) to make sure buyers have the ability to save.
Every lender is required to review every deposit in every borrower’s bank and investment account statements – and every “unusual” deposit has to be explained and “paper-trailed.”
An unusually large deposit is one that is over 50% of a buyer’s monthly income (for conventional loans), and over 1% of the purchase prices (for FHA). Jumbo lenders have their own rules that vary from lender to lender.
Chasing paper-trails is what frustrates borrowers so often, but lenders have to have them. If a deposit cannot be paper-trailed, the related funds cannot be used towards a purchase. And sometimes a “tainted” deposit can invalidate an entire account (creating major issues for buyers and lenders alike).
If buyers are intent on using funds that cannot be paper-trailed, they need to be sure to deposit those funds into their accounts at least three months before they start making offers. This will ensure that those deposits do not show up on any bank or investment account statements.
Here are some sources of funds that are always considered “Seasoned” even if the deposits are very recent.
- Income tax refunds
- Security deposit refunds
- Earned salary income
- Bonus income (provides for much flexibility)
- Contract/Invoice income for self-employed borrowers
- Home equity line of credit funds (buyers can use equity line funds any time)
- Proceeds from the sale of stocks or securities
- Proceeds from the sale of an automobile or other vehicles
- Proceeds from the sale of real estate.
- Valid gift funds (with a signed gift letter)
Founder/Broker | JVM Lending
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