One of the main decision points for a mortgage lender to write a pre-approval letter for a prospective buyer is the amount of savings. This is a sure sign for a lender that the borrower is or is not fiscally responsible and mature. Some borrowers try to circumvent a regular pattern of savings by making a single large deposit. Let’s examine this strategy.
Once again, it’s not about finding a mortgage requiring no down payment. It’s not about having enough to pay for closing costs. It is about living a life style that shows a lender the borrower knows to save for a rainy day. Homeownership requires having some disposable cash to address unexpected emergencies. A lender wants to be sure the borrower can do that.
Wise One-Time Deposits – There are some homebuyers that have a significant amount of money saved. They just need to transfer funds from a retirement or other type of asset into checking account for the down payment or closing costs. That is the whole purpose in saving. Keeping financial assets in reserve for achieving a major goal or to meet an unexpected emergency is the only real reason to save.
Gifts May Be A Problem – Asking a parent, friend or employer for a one-time gift to make a down payment or pay for closing costs is very legal. Just be aware of a couple of issues associated with a gift.
Both sides need to fully understand the tax implications. Before making a withdrawal, consult with an accountant. Know the tax rules. Get a professional opinion based on a specific set of circumstances. If a certified public accountant indicates the gift is free of special taxation (by the benefactor or recipient), then proceed. Otherwise, it is best to resort to “Plan B.”
Sometimes a buyer may need just a small gift to achieve a set goal. As an example, if a borrower needs $3,500 for a down payment and has $3,000 in savings, then a $500 gift might not become a pre-approval negative factor. But be certain of the tax laws by getting a professional opinion.
Gifts May Not Be A Problem – It is possible that a borrower could make a large one-time financial deposit that the lender understands. One example is a collection of small gifts that honor a special occasion like a wedding or child birth. A wedding or child birth are both very logical reasons to buy a home. Some employers provide assistance to faithful employees to purchase a home. All of that is very legal and very ethical.
Prove It – One of the mortgage pre-approval documents is a copy of recent bank statements. These show both deposits and withdrawals. Lenders look to do more than just establish spending patterns. They want to see income and saving patterns as well.
If there is a large one-time deposit, expect the lender to request additional documentation of the origin of this money. Lenders got into a lot of financial difficulty for making bad loans a few years ago. Don’t blame them for correcting a mistake in their lending practices.
Normally a transfer of personal funds from one account to another requires no special documentation. That is because the lender already has a copy of the statement from that other account.
If the source of a large one-time deposit is a parental gift, expect the lender to question the parent about the rationale for the gift and the original source of that gift. If the source is a collection of smaller gifts to honor a special occasion, make a copy of the checks prior to the deposit. Document the special event with a marriage or birth certificate.
An employer’s gift might necessitate an explanation of the company’s business policy and how this particular employee meets that standard. If the employer loaned the employee the money, the mortgage lender might have to compute the income versus debt ratio again.
Bottom Line – When a large one-time deposit appears on a bank statement, it raises the curiosity of a lender. Keep in mind the lender wants to make a good mortgage. That is why they must question the origin of one-time deposits.
Getting mortgage pre-approval is a tedious job. Start the job by making savings a regular habit. Don’t be afraid to ask help. But be prepared to explain the source of that help.
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Andy Kalinowski is a REALTOR® with CENTURY 21 Doris Hardy and Associates, LLC in Columbus, Mississippi. Contact him by cell (or text) phone – 662.549.3421 or by e-mail – andyk@dorishardy.com. He is also available for web video chat.
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