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Cash Deposit: A Definition

Sarah Li Cain8-Minute Read
June 04, 2021

Yes, the term “cash is king” is still as relevant as ever, but sometimes making a cash deposit could make you look suspicious. In other words, if you’re depositing a large amount of cash in your bank account, banks may hold your money temporarily because the transaction may be flagged for fraud.

That’s not to say you can’t make a cash deposit – it’s all in how you do it. Let’s explore what cash deposits are, why they’re important, and how they might impact your mortgage application during the home buying process.

What Is A Cash Deposit?

A cash deposit is an amount of money that a person deposits into their bank account through an electronic transfer, ATM or in person with a bank teller. They are usually put into money market, checking or savings accounts.Some examples of common cash deposit sources include:
  • Income earned from tips or side gigs paid in cash
  • Repayment of a personal loan you provided to someone else
  • Money you borrowed from a personal loan
  • Gift money from a birthday, wedding or graduation
  • Donations or fundraiser collections
  • Money from a garage sale or sale of such large assets as a car, boat, or piece of furniture
  • Cash stashed or saved somewhere other than a bank account

How Does A Cash Deposit Work?

When you make a cash deposit, depending on how you do so, you’ll be required to fill out a deposit slip. Details you’ll need to provide include the number of the account you want to make the deposit to, the name of the account holder, and the dollar amount being deposited.

When a person deposits money into a financial institution, the institution is liable to keep the account holder’s money safe. Once the deposit is completed, the bank is responsible for making the funds available to the account holder.

What Forms Of Money Can You Use For A Cash Deposit?

Money deposited can be in the form of cash, checks or money transfers. The money may come from various income sources, including:

  • Paychecks
  • Money orders
  • Tax refunds
  • Distributions from retirement accounts
  • Social Security
  • Trusts
  • Stocks
  • Bonds
  • Mutual funds

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Why Are Cash Deposits Important?

Cash deposits are important because it’s crucial you understand how to transfer money without incident. For instance, if you make a cash deposit of $10,000 or more, the bank may report this activity to the IRS. The point is to monitor where money comes and goes to prevent potential fraud — think counterfeit money and stolen cash. In most cases, you’ll be fine, but the bank may hold onto the deposit temporarily if it suspects fraud.

Plus, if you’re buying a house, lenders will scrutinize large cash deposits to ensure the money you claim to have was obtained legally and was not loaned to you. More specifically, lenders are looking to see that you're not borrowing money to inflate your income, the funds are from legal sources and that you’re not misrepresenting your financial situation in any way. More on this later.

Where And How To Deposit Cash Into A Bank Account

As mentioned briefly above, you can make a cash deposit through a financial institution. Here are more specific ways you can do so depending on your location and type of financial institution.

ATM

You can deposit cash into a bank account using an ATM — all you need is your debit card. First swipe your card and follow the prompts on the machines on how to make a transaction. If you have physical cash on you, you’ll be prompted to put it into the correct slot. Keep in mind many third-party network ATMs may not accept cash deposits.

Local Bank Or Credit Union

Heading to a local bank or credit union to make a deposit is as simple as showing up and filling out a deposit slip. Information you’ll need is the account holder’s name, account number and the amount you want to deposit.

Online Bank

Using an online bank to make a cash deposit is as simple as following the prompts once you log into your account. Though you won’t need a physical deposit slip, you’ll be asked to provide the same information to successfully make a deposit.

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

When verifying your income and assets for a mortgage, 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’s 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

Your debt-to-income ratio (DTI) 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. 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 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.

As a reminder, mortgage preapproval is a great first step when you’re ready to buy a home, and can help you avoid some potential pitfalls of the mortgage qualification process. 

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How To Prove Cash Deposits For Your Mortgage

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 home loan you get. Here are some examples of how to explain a 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

You should ensure you’re keeping a paper trail of any previous or future transactions by organizing receipts, gift letters, checks, contracts, certificates and other useful documents involved in the transaction.

It’s best to 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.

As a good rule of thumb, always talk to your lender before making any financial transactions during the home buying process.

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.

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’re 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 2 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.

Remember, 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.

FAQ: Cash Deposit

Now that we have an established understanding of what a cash deposit is and how it could impact buying a home, we’ll look into some common questions.

How much cash can I deposit before it’s reported?

When a person deposits a cash payment of $10,000 or more, your financial institution will report the transaction to the IRS. Payments can be in the form of a single or multiple cash transactions that add up to this dollar amount over the year.

What do I do if the deposit I made doesn't match the receipt?

If the cash deposit doesn’t match what shows up in your transaction report or deposit slip, you need to contact the financial institution right away. If you made a deposit in person, be sure to have the teller count the cash in front of you and confirm the amount on the deposit before you leave.

How soon will my checks clear after depositing them?

It typically takes 2 – 5 business days for checks to clear.

What determines when your funds will be made available?

The timing for when deposited funds will be available is determined by the type of deposit, the time and the amount deposited.

How do I deposit money into someone else's bank account?

To deposit money into someone else’s account, you’ll need their banking details, which includes the account number, routing number of the financial institution, and their full name.

The Bottom Line

Cash deposits can be a safe and secure way to transfer or withdraw money from a bank account. As great as it is to have extra money in your bank account, it’s crucial for lenders to see a clean and clear paper trail for any cash deposits when buying a house.Keep in mind that certain transactions may be flagged by the IRS, though if you’re doing everything legally, it may not be a big deal. If you’re ready to start the home buying process, get approved today with Rocket Mortgage.

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Sarah Li Cain

Sarah Li Cain is a freelance personal finance, credit and real estate writer who works with Fintech startups and Fortune 500 financial services companies to educate consumers through her writing. She’s also a candidate for the Accredited Financial Counselor designation and the host of Beyond The Dollar, where she and her guests have deep and honest conversations on how money affects our well-being.