Secured loan proceeds

Funds derived from a loan secured by a personal property or real property owned by the borrower may be considered as acceptable liquid asset. Of course, these debts must be included in the applicant’s debt-to-income (DTI) qualification ratio. Unsecured personal loans (e.g., credit card cash advance, signature loans, personal loans, etc.) are normally not eligible for conforming loans. However, some non-conforming programs will allow unsecured loan funds.
Lenders are very concerned about potentially borrowed funds, because these would increase the borrower’s liabilities and may disqualify the borrower’s debt-to-income ratios. The borrower must explain events that may indicate borrowed down payment funds:
New account. A savings or checking account that was recently opened may indicate borrowed funds.
Sudden deposit. An existing account that suddenly contains a significantly higher than average balance may indicate the deposit of unacceptable funds.
New loans. A new loan may indicate that the applicant has borrowed money for the down payment. A more serious event may be if the lender sees several inquiries on the credit report indicating that the borrower is racking up debt. For example, if the borrower’s credit report shows several inquiries by car dealerships, the lender will want to know if the borrower has just obtained a car loan.
Undocumented money. Due to verification difficulties, “cash on hand” and “mattress money” are not acceptable liquid assets with conforming loans; however, many nonconforming lenders will accept them.

Cash gift

Gifts from relatives are normally acceptable source of funds, with restrictions. If the applicant is using gift funds, the applicant is still required to have sufficient personal funds to cover a minimum portion of the down payment:

• 97% LTV loan. If the applicant will be providing a total down payment of only 3% of price, that entire 3% must come from the applicant’s personal funds. Gift funds may be used for closing costs and reserves, but NOT for this minimum down payment.

• 95% LTV loan. When the total down payment is 5%, the first 3% must come from the applicant’s personal funds. The remaining 2%—as well as other closing costs and reserves—may be covered by gift funds.

• 90%+ LTV loan. If the applicant will be providing at least 10% of down payment, the first 6% must come from the borrower’s personal funds. The remaining 4% and more—as well as other closing costs and reserves—may be covered by gift funds.

When gift funds are being used, the loan processor will require additional items to verify that the funds are acceptable

1. Gift letter. The gift letter must come from a qualified donor (relative) and must clearly state (1) the relationship between the borrower and donor and (2) that no repayment is expected or implied. Gifts or equity credits from the builder or seller are not acceptable gift funds.
2. Donor source documentation. The donor must demonstrate that they have the funds to give as a gift. Copies of the donor’s bank or asset statements for the accounts from which the gift funds will be drawn must be provided.
3. Copy of gift check. The applicant must make a copy of the gift check provided by the donor.
4. Verification of deposit. The applicant must verify that he or she has deposited the gift funds. A deposit slip indicating the date, account and amount should be sufficient.

Cash deposits toward purchase

With purchases, buyers are normally required to make a large deposit to secure the purchase contract. This deposit is usually called the earnest money deposit, and is held by the seller’s agent. This deposit is credited toward the applicant’s liquid asset requirements. Loan processors will normally require the following items to confirm that the funds used for the earnest money deposit are acceptable:
1. A Verification of Earnest Money Deposit (VEMD) completed by the agent or Realtor currently holding the earnest money.
2. The canceled check used for the down payment, if it has been processed by the applicant’s bank and returned to the applicant. This shows that a deposit was actually made.
3. Copy of bank statement showing source of the bank funds.

Cash on deposit

The primary source of documented liquid assets for most applicants is the applicant’s bank account balances. The typical processing requirements are copies of at least two months of the applicant’s bank statements. This should be the most recent two months. Undeposited cash or “mattress money” will not be acceptable with conforming programs, primarily because those funds may be borrowed (which increases debt) or unreported income (which is illegal). Applicants with substantial undeposited cash should deposit those funds immediately. Unfortunately, that applicant may have to wait at least three months before applying for a conforming residential loan. If the applicant cannot provide bank statements, he or she can request a printout from the bank
teller. Otherwise, the loan processor will have to send a verification letter to the bank to verify the current and average balance for the borrower’s accounts.
As the processor reviews these bank statements, he or she will confirm the account ownership but will focus on two elements:
1. Current balance. This amount is normally what the applicant can use for qualification.
2. Average balance. The account’s average over the past two to three months will tell the processor whether the borrower has made any large deposits during the past months. Any unusual, large deposits must be explained and documented, because lenders are primarily worried those deposits may have come from unacceptable sources.