Paper Trailing Funds in a Mad, Mad Mortgage World
One of the most common and frustrating obstacles confronting mortgage borrowers these days stems from guideline requirements for the meticulous paper trailing of all assets and funds-to-close. As always, one is well-served by investing a bit more work on the initial application to mitigate lender concerns. Those who don’t, risk entering into a vicious cycle of underwriting conditions that will test the outer limits of their patience and, potentially, kill their loan.
In addition to qualifying a borrower’s income and credit rating, every lender will require asset statements for at least the most recent two-month period. They will need all pages and will examine statements with a fine eye. Generally, every deposit or transfer of funds into a given account in excess of $500 will need to be sourced, unless already tied to salary or a verified disbursement, such as from social security. To verify miscellaneous deposits, a borrower will usually need to provide a copy of the check and a brief letter of explanation. If transferring funds from one account into another, the lender will need two months’ statements for both accounts. When stocks are sold, the lender will require the record of sale and transfer into the final account.
Although the paper trailing of funds can be extremely tedious, it is required for all loans and must be addressed with great care. A lender’s underwriter must verify that all assets and sources of income have been fully verified. While the process may seem ridiculous to a borrower, the concern to a lender is that unqualified funds may represent additional borrowed funds that could adversely affect their debt ratios. Undocumented funds might also suggest self-employed income with unqualified business expenses. For these reasons, one’s asset statements must be carefully documented from the outset. Here are a few pointers to be aware of:
- Present all statements for all assets you will be relying on at the beginning of your transaction. These include loan reserve requirements, earnest money deposits, down payment funds, and closing costs. One common mistake borrowers make is to wire their final funds from a new, previously undisclosed account. Unless the new source is fully qualified with two months statements, their loan cannot fund and will either be delayed or denied.
- The lender will need statements for the most recent two-month period, with all pages included.
- Document sources of deposits such as social security or pension income with their respective award letters.
- For any deposit exceeding $500 you should provide a copy of the cashed check and a brief letter explaining the source.
- Any transfer between accounts must be supported with full statements from both accounts.
- If using stock proceeds, you will need to provide a record of sale and of transfers between all accounts.
- For gift funds, the gift maker will need to provide a letter verifying the funds are a gift with no expected repayment. The must also provide a statement proving ownership of funds along with evidence the funds were withdrawn or transferred from their account. The borrower will then need to show the deposit was made into their account.