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Cash Deposits And Home Buying: Why Cash Isn’t Always King

5-minute readJune 03, 2021

You may have heard the saying “cash is king.” And while that’s true in many cases, when it comes to mortgage transactions, cash is more like a jester. That’s because it can make the process for getting a mortgage more difficult and could potentially make you look like a fraud. If you think you can just deposit your mattress money or garage sale earnings into your bank account to help you pay that down payment, think again. Cash deposits can actually ruin your chances of being approved for a mortgage. Read on to learn more about cash deposits, how they can affect your mortgage application and how to prevent issues during the home buying process.

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What Are Cash Deposits?

Cash deposits are money put into a bank account via electronic transfer, ATM or bank teller. They can be in the form of cash, checks or money transfers and may come from places other than typical income sources like a paycheck, tax refund, retirement account, social security, trusts and stocks, bonds and mutual funds. A few examples of common cash deposit sources include:

  • Money from tips or “under-the-table” pay
  • Repayment of a personal loan you provided
  • Money you borrowed from a personal loan
  • Gift money from a birthday, wedding, graduation, etc.
  • Donations or money raised on your behalf
  • Money from a garage sale or sale of such large assets as a car, boat, or piece of furniture
  • “Mattress money” or money saved somewhere other than a bank account

Whatever the source of your cash deposit – and we’re hoping it’s a legal one – you’ll need to prove that’s in fact where your money came from if you plan on using it to make a down payment or qualify for a mortgage.

How Do Cash Deposits Affect Your Ability To Buy A Home?

When it comes to verifying your income and assets there are two main things your lender wants to know: that the money you have was obtained legally and that it is not loaned to you. Here’s why this type of information is important to lenders – and the government.

Legal Implications

Because of fraudulent mortgage activities in the past, lenders are even more thorough when it comes to proving the source of a borrower’s income and assets. When a lender looks at your income sources, it is looking for possible fraud. This could include: 

  • Using borrowed money to inflate your income
  • Borrowing money from the seller to make a down payment
  • Misrepresenting or faking employment status

But fraud isn’t the only thing lenders are looking for. Believe it or not, a lot of money laundering, funding for terrorist groups and other illegal activities are done through real estate transactions. As part of the Bank Secrecy Act and the Patriot Act, lenders are required to report to and work with the U.S. government when money laundering or terrorist activity is suspected.

Mortgage Eligibility

Debt-to-income ratio is your monthly debt (auto loans, credit card payments, student loans, etc.) compared to your monthly income. It helps lenders determine whether you can afford a mortgage or not. When it comes to DTI, the lower the better.

To qualify for a mortgage, you must be under a certain DTI ratio – typically around 43% or less. Cash deposits that are borrowed from a personal loan are considered debt and will be calculated into your DTI and could have a negative effect on it. If it raises your DTI over the maximum, you could be denied for a mortgage. Keep in mind, too, that some loan programs do not allow you to borrow money from other sources, so even if your DTI is still low, you could still be denied. You must disclose if a cash deposit is from a personal loan. Hiding this information or lying about it is considered fraud.

How Do You Source A Cash Deposit?

Sourcing cash deposits means proving their origin, or where they came from. What is accepted as legitimate proof may depend on the lender or type of loan you get. Here are some examples of ways to source your cash deposit:

  • Pay stubs or invoices
  • Report of sale
  • Copy of marriage license
  • Signed and dated copy of note for any loan you provided and proof you lent the money
  • Gift letter signed and dated by the donor and receiver
  • Letter of explanation from a licensed attorney
  • Signed letter from the person who provided funds
  • Discussion with your mortgage lender

A Note On Gifts 

Gift deposits can be tricky. What is deemed an acceptable gift and what is not will depend on the lender and the specific loan’s requirements.

Here are a couple of things to keep in mind when it comes to gifts:

Money gifted from such family members as parents, grandparents, siblings, in-laws, aunts, uncles, cousins and children is acceptable. However, money gifted from people who have an interest in your mortgage transaction, including the seller, builder, real estate agent or developer, is not allowed.

Along with a gift letter, you’ll need to show the actual transfer of funds, which could be withdrawal/deposit slips or wire transfer receipts.

If you are making a cash deposit from money received, such as wedding gifts, make sure you deposit that money no later than 60 days after the marriage.

How Far Back Must You Source A Cash Deposit?

Mortgage lenders typically look at bank deposits from the past two months, or 60 days, to verify your assets and income. Any money in the account before that is typically seen as “seasoned” funds and are owned by you despite the source. However, keep in mind that you still need to obtain those funds legally and shouldn’t take money from parties who have an interest in your transaction. Doing so can still get you into trouble whether those funds are seasoned or not. You should also be aware that banks are legally required to report any cash deposits of $10,000 or more to the IRS. This happens with one-time deposits of that amount or smaller deposits made over time that accumulate to that amount, known as “layered deposits.”

If you do have cash from legitimate sources, like selling a car or money you saved over time, deposit it at least 60 days before you apply for a mortgage to avoid the hassle. There are a few other ways to avoid issues, too.

How To Avoid Cash Deposit Issues

If you don’t want to wait 60 days to start the home buying process but plan to deposit cash, being proactive is your best bet. When talking to your lender, let them know about any cash deposits you made within the last 60 days or plan to make during the process. Ask them what you will need to properly source this money and if it will be accepted. Get their advice on the steps to take to make the process as smooth as possible.

Get all of the documentation you need ahead of time instead of scrambling for it when you’re down to the wire. For any future cash earnings, get the proper documentation throughout the transaction process. You want to provide a paper trail, so keep any and all receipts, letters, checks, certificates and other documentation involved in the transaction.

Refrain from depositing any cash funds that may be hard or impossible to source but know that you won’t be able to use those funds when getting a mortgage to purchase your home. Talk to your lender before depositing any cash during your home buying process. Better yet, as a good rule of thumb, always talk to your lender before making any financial transactions during the home buying process.

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