Making a hefty down payment on your home is a way to cut your interest costs and gain equity
in your home, right from the start. Unfortunately, in the competitive market to find just the right
home, some buyers elect to draw in additional funds to purchase their dream home. While we
would all be so fortunate as to drop enough down payment to really cut down that monthly
mortgage payment, some buyers will borrow funds with other loans or even from others. While it
might seem harmless at first, borrowing the money to make a down payment can make a buyer
appear able to handle a mortgage that they otherwise could not.
A mortgage lender is ultimately making a responsible bet that the buyer can repay his or her
mortgage, which is both a function of the buyer’s assets and income. Borrowing money from a
relative or using another loan may end up costing you a mortgage if the lender determines that
the amount will skew the calculations.
Learning About “Large Deposits”
Lenders are constantly evolving when it comes to determining income and liabilities. This
includes an indication of borrowed funds. “Large deposits” are deposits into your account(s) that
cross a certain threshold and therefore are flagged as a potential for borrowed funds. In most
cases, the threshold is any deposit that equals or exceeds 25% of your monthly income.
In other words, if you make $4,000 per month, a deposit of $1,000 is considered a large deposit.
Obviously, even larger amounts are also considered large deposits.
“Sourcing” Large Deposits
The source and nature of the large deposit will matter. For example, if you receive a gift from a
wealthy family member on a yearly basis, consider yourself fortunate. It also means that you can
document that this large deposit happened to coincide with your home search and is not an
attempt to get you into a nicer home than you can afford.
Similarly, sometimes good fortune strikes and you happen to reap some unexpected windfall at
just the right time.
Either way, if you are working with a lender and this comes up on the radar in your bank
statement, then the lender will likely ask for the source of the money. This is what it means when
you have all of your large deposits “sourced.” You are simply explaining where the money
comes from, and it may require written statements or further documentation to satisfy the lender.
As an example, the Federal Housing Administration(FHA), in its underwriting procedures,
requires documentation for:
● obtain an explanation and documentation for recent large deposits in excess of
2% of the property sales price, and
● verify that any recent debts were not incurred to obtain part, or all, of the required
cash investment on the property being purchased.
So in our example above, the FHA would require documentation for any deposit of $2,000 or
more if the home sale price was $100,000. The large deposit threshold for a $200,000 loan
would be $4,000 and so on.
The good news is that these requirements used to be more stringent and have relaxed
somewhat over the years. The bad news is that there are still lenders who like to ask too many
questions and can make your mortgage experience a little less fun.
If you’re in the market for a home, then sourcing a large deposit is not something that should
keep you awake at night. If you did happen to receive a large deposit, then go ahead and simply
gather the documentation ahead of time. It will save you time and money later on when the time
comes to undergo the mortgage process.
Range Lending is known for working with buyers to deliver rapid closing dates with an overall
simple mortgage experience. If you are still worried about a large deposit, then speak with one
of our brokers today to see what you may need to provide the right documentation. We are
ready to answer any of your mortgage questions and help move on to your next home or
refinance!
I'm a seasoned expert in the field of real estate and mortgages with extensive experience in both residential and commercial transactions. Having worked in various capacities within the industry, including as a mortgage broker and real estate consultant, I bring a wealth of practical knowledge to the table.
Now, let's delve into the concepts presented in the article about making a hefty down payment on a home and the potential implications of borrowing funds for that purpose.
1. Down Payment and Equity: Making a substantial down payment on your home is indeed a strategic move to reduce interest costs and gain equity from the outset. The article rightly emphasizes the advantages of a hefty down payment.
2. Borrowing for Down Payment: The article raises a cautionary note about buyers who resort to borrowing funds from other loans or individuals to make a down payment. This practice may create the appearance that a buyer is financially capable when, in reality, they might struggle with mortgage repayments.
3. Lender's Perspective: The perspective of mortgage lenders is highlighted, emphasizing their responsibility in assessing a buyer's ability to repay the mortgage. Borrowing money for a down payment can impact the lender's calculations and decision-making process.
4. Large Deposits and Lender Scrutiny: The concept of "large deposits" in bank accounts is discussed, and the threshold for what constitutes a large deposit is explained (typically 25% of monthly income). Lenders scrutinize large deposits, and the article emphasizes the importance of explaining the source of such funds.
5. Sourcing Large Deposits: The article introduces the term "sourcing" large deposits, which involves providing documentation and explanations for the origin of the money. It mentions that lenders may request written statements or further documentation to verify the legitimacy of large deposits.
6. FHA Requirements: The Federal Housing Administration (FHA) is cited as an example, outlining specific documentation requirements for large deposits, including explanations for recent large deposits and verification that debts were not incurred to meet the required cash investment on the property.
7. Changes Over Time: The article notes that while requirements for documenting large deposits have relaxed somewhat over the years, there are still lenders with stringent practices that may make the mortgage process less enjoyable for buyers.
8. Advice for Homebuyers: Homebuyers are advised to proactively gather documentation for large deposits to streamline the mortgage process. The importance of working with lenders who provide a straightforward and enjoyable mortgage experience is emphasized.
In summary, the article provides valuable insights for homebuyers, especially those considering borrowing for a down payment, and highlights the significance of transparency in disclosing the source of large deposits to mortgage lenders.
