Cash Deposits & Mortgages Don’t Mix!
We want to help parties to a home purchase avoid a very common mortgage problem – Cash Deposits. But, cash is king! Right? Not when it comes to the mortgage lending industry. So the primary reason is that lenders cannot document the source of deposit with certainty.
Here are some common, but avoidable examples of cash deposits.
- Earnest money deposits paid in cash
- Cash deposits into the borrower’s bank account
- Buyer’s sale of an asset for cash
- Gifts from family members in the form of cash
In this article, we explain how buyers, sellers, buyer’s agents, and listing agents can prevent this issue.
Top reasons mortgage lenders must source general or cash deposits
Lenders are not picking on buyers. They are just following the rules plus being prudent lenders. Reasons for the requirements include…
- Lending agencies such as FHA, USDA, VA require it
- Ensure the source is not a new debt
- It could be an advance from a payday loan, credit card, retirement, etc
- Are the funds an eligible gift?
- Loan fraud prevention **
- Lenders are required by federal regulation to ensure not funding terrorism, money laundering, or other illegal activities. See an excerpt explaining Bank Secrecy Act, Anti-money laundering, and office of foreign assets control requirements here.
** Most of the requirements mortgage process participants endure, result from past fraud. As an illustration, fraud may include sellers providing a buyer or buyer’s family the down payment. So because of previous fraudulent activities, today’s borrowers must thoroughly document files.
Buyers, Avoid These Cash Issues
We can’t stress these points enough. If you follow these tips, it can save you a lot of paperwork or issues.
- Do not deposit cash into your bank account.
- Cash should not be used to pay an earnest money deposit
- Assets sold for cash are an issue
- Ask us before depositing anything in your bank account other than direct deposit of income sources
A Buyers Agent’s Role in Advising Buyers
Additionally, buyer’s agents are key to avoiding cash deposit problems. They are often working with the buyer earliest in the purchase process. So a knowledgeable realtor can provide some valuable tidbits for their buyer. Foremost, do not let the buyer pay an earnest money deposit with cash! Furthermore, question the source of an EMD paid with a money order. Certainly, at least ask if it came from the buyer’s checking or savings account. Also, often the source of a money order is cash on hand. A buyer often just doesn’t realize the significance of sourcing these payments up-front as the mortgage process is not an everyday occurrence.
Next, an agent should counsel the buyers about the avoidance of cash deposits into their bank accounts. Finally, mention the importance of providing correct documentation to prove deposit sources if applicable. Proving the source of cash deposits can be extremely difficult. Site examples from this article to get the point across about cash. It could really save their home loan!
Listing Agents, Watch Out
There are even safeguards that a listing agent can follow to protect their sellers against cash woes. For instance, if an agent or buyer presents a cash earnest money deposit, question it. Ask the buyer side of the transaction to verify acceptance with the mortgage company. Additionally listing agents should advise their sellers of cash deposit pitfalls. If the seller will buy a new home, get this information to them early. An ounce of prevention is worth a pound of cure! Therefore listing agents may help avert later problems with this important knowledge.
Buyer Recommendations for a Successful Closing
If you are a buyer thinking of a home purchase in the future, keep these points in mind. Normally, we are going to ask for the 2 most recent statements for all checking, savings, and retirement accounts. Please realize that often making general or cash deposits will at least cause additional documentation. Although many mortgage programs have allowances for general deposits, there are good practices to follow. For instance, copy any checks deposited so that you can prove the source for the general deposit. If you sell an asset like a car, keep a detailed paper trail. The paper trail could prove the asset conversion to liquid assets.
So as a general rule, avoid cash deposits and definitely any cash earnest money deposits. Remember, we welcome early discussion of mortgage documentation requirements with realtors and buyers.
- How & when to document earnest money deposit funds
- Gift funds requirements for FHA loans – good rules to know up-front!
- Interesting third party article giving perspective on deposit documentation requirements
Keep in mind, Team Move lends throughout North Carolina, South Carolina, and Virginia.
Author: Russell Smith
Team Move OVM Financial loan officer success is Russell’s primary focus. He provides the tools and techniques he used as a top producing loan officer. Additionally he offers the Team Move OVM Financial Agent Training Program. Sharing is so important to Russell so he works diligently to be a resource to loan originators and Realtors.