Back to Fundamentals: Source of Funds.
Mortgage professionals are often chided by customers and REALTORS® for our requirement to verify the source of funds a borrower brings to closing. The money is in the checking or savings account – who cares where it came from? Right?
The “source of funds” is of primary importance (read my last post for the reason why). I had a client case not too long ago where in every month’s bank statement for the past six months we saw deposits that were not from the borrower’s income source. When we inquired about this we were told various things from “I got a gift from my parents” to “I took a cash advance on a credit card” and even “I made a loan from my 401k account.”
I spent some delicate time talking about whether or not a home purchase was a good idea at the time. We also told them that the lender would not likely approve the loan because the funds in the bank account that being used for the down payment included unacceptable sources.
The 401k loan and the gift from the parent were technically acceptable once we documented the sources and had a signature from the parents that this was in fact a gift. However, the cash advance on a credit card was not acceptable and was essentially borrowed money rather than the investment from the borrower that the lender is looking for.
We are able to use money that the borrower saves or we can use money borrowed against an asset that the customer already owns, for instance a car or 401k account. The savings is generally a good idea. Borrowing money rarely is.
The fact is, banks will go to GREAT lengths to determine the source of funds. Be prepared to dig into your files and computer archives for the proof that your money is in fact, your money.