Mortgage lenders have long required prospective borrowers to hand over copies of recent checking account statements. But nowadays, lenders are demanding documentation of individual deposits as well.
The new trend "has become a monster in the making over the last two to 12 months," says Kirk Chivas, chief operating officer at First Commerce Financial in Wixom, Mich.
"They're saying if it's non-payroll, you need to tell them what it is because not all of it is allowable funds," he explains.
The implications are potentially harsh. If you held a garage sale, won an office football pool or received a monetary gift and deposited that money into your bank account, that could be the end of your mortgage application, says Joe Parsons, senior loan officer at PFS Funding, a mortgage company in Dublin, Calif.
"If (the deposit) isn't obviously identified as being a direct deposit from the IRS or state franchise tax board or part of your work, there will be problems because that money can't be counted (toward) funds required to close," he says.
The requirement also applies to money transferred into your account from other accounts, even if those accounts are also in your name, says Parsons.
"If there are transfers, say, $1,000 from savings into checking, and it's identified as such on the checking account statement, we'll have to provide the bank statement for the savings account as well," he says. "We'll have to open that can of worms."
The minimum dollar amount that will trigger this requirement depends on the lender's guidelines. Parsons says documentation typically is needed for any deposit of more than $400 or $500. But Chivas says borrowers might be asked to provide evidence and explanation of deposits as small as $100.
Do's and Don'ts
An explanatory letter is unlikely to be adequate documentation, according to Jim Simms, a loan officer at Century Mortgage in Louisville, Ky. Instead, Simms says, you'll need true supporting evidence, such as a copy of a canceled check that shows the source of the money.
Rather than try to document every deposit, Simms and Parsons say it's better not to make deposits or transfers before or during the mortgage application process.
"Don't shift money around at random and don't open additional accounts," Parsons says. "Don't do that because you'll have to document it."
Simms says he's taking a "proactive approach," telling his clients not to make any non-payroll deposits for as long as six months before they expect to close.
"Don't be putting money into your account, unless it comes from your payroll," says Simms. "You have to prove where it came from and how it came to be in your account. If it just fell from air, there is no way. It is not going to close."
He also recommends keeping copies of canceled checks, bank statements, paystubs, and deposit slips -- basically "anything that involves money." If you don't have a filing systems, get a big envelope and drop all the documents into it.
Why this is happening
All this additional documentation isn't merely an excuse for more paperwork. Rather, Parsons suggests, lenders are on the lookout for illegal money-laundering activities, unacceptable sources of reserves and closing costs, and undisclosed debts, such as credit card cash advances.
Simms suggests that an increase in cash-strapped borrowers might be part of lenders' motivation as well since those who are scraping together the money are more likely to make non-payroll deposits that could be suspicious.
"I had a (client) last week who sold his comic book collection," Simms says. "In my 25 years (in the mortgage business), I've never had anyone sell a comic book collection. The week before somebody sold a car and another one sold a motorcycle."
A small proportion of lenders, perhaps 10-15 percent to use Parsons' rough estimate, will allow some flexibility for smaller non-payroll deposits, but those lenders are the exception as he says most will hold fast to their guidelines.
"In some cases, at the discretion of the underwriter, it may be possible to disregard that un-documentable income and pretend that doesn't exist," he says.
All things considered, though, it's best to plan ahead and avoid cash deposits and transfers rather than try to document what you did or trust the lender's leeway.