This is the third blog in a series of four covering the criteria the underwriter looks at when they make a loan decision. The four C’s, as mortgage lenders call them, are capacity, credit, cash and collateral. Today I want to address cash and I know everyone wants to have lots of that!
Cash is a literal word, meaning notes, currency or coins. Cash, in our lending world, is verifiable assets that you have available to use for the purchase of your home, whether that’s to cover down payment or closing costs, and in some instances, reserves. Reserves would be assets you have left over after the purchase. Some programs require reserves, and if your loan program does, your lender will advise how much you need post-closing.
Most commonly, cash is the money you have saved in a checking or savings account. Cash can also be accounts that aren’t completely or immediately liquid like stocks, mutual funds or retirement. Guidelines for the loan program you do will determine acceptability of these funds.
Interestingly, cash – actual currency or coins – is typically not acceptable in a purchase or refinance transaction. Seems contradictory to what we are trying to verify, doesn’t it? What I mean is two-fold. First, you cannot go to your closing day with a suitcase full of $100’s to pay for your down payment and costs. The funds must be from an account, such as a checking or savings account, something liquid. More than likely, you will either wire the funds or bring a cashier’s check to closing. You won’t physically bring in the green!
The second part is that cash deposits into your bank accounts typically won’t be counted as your available liquid assets. Again, seems odd, especially if you commonly save money at home or in a safe deposit box and then deposit it into your account. It’s your money, so why isn’t this allowed? Such a good question and it comes back to verifiability. There is no way for the lender to prove that the funds are yours to begin with or prove they are not. Also, that money could be a gift or from a loan, both options requiring further explanation and documentation.
Now, I did say that cash is typically not acceptable. There are some instances where cash deposits may be okay. Let’s say your position has regular pay but also has tip income. It is probably a normal part of your deposits to put cash into your account due to the nature of your job. This, and other situations where cash deposits are common, are looked at on a case by case basis to satisfy lender or investor guidelines.
In terms of documentation, we will request the last TWO months bank statements to verify your assets or the last quarterly statement you have for investment accounts, such as mutual funds or retirement. We may ask for explanations, and possibly document, any deposits that are out of the ordinary from your regular work direct deposits. If you hand-deposit checks each pay period, we may need copies of those checks to confirm they are work related.
Assets other than a checking or savings account (including money market), are usable for closing. We would not only document having the funds, per statements mentioned above, but we may need to verify liquidation of the funds and then prove they are indeed in a liquid account.
Did you know that retirement is acceptable for down payment and closing costs? A withdrawal is allowed and we would verify this; but in some instances, a loan against the account would be acceptable assuming your company allows for this. And the really good news? Any monthly payment you have from setting up a loan against your 401K is NOT considered in the ratios (discussed in the credit “C”). Of course, we will verify this transaction going out of the 401K and going into a liquid account.
Most programs allow for gifts from family members, so this may be an option for you. This money may, or may not, already be in your account. There are specific guidelines to follow and documentation requirements vary depending on the loan program.
What if the assets are tied up in other property? Taking a loan against a home, such as a home equity loan, may be acceptable as well. Same would apply in that we would verify the receipt of funds. Now that you have a loan, there will be a monthly payment that WILL have to be counted in your ratios.
Biggest thing we are looking for is to make sure you have enough for closing costs and the required down payment. We do look for a history of deposits and make sure that there aren’t any out-of-the-ordinary deposits. If you have a history of overdrafts, this may negatively impact the loan decision, but ultimately, it’s up to the underwriter based on your history, hence the reason we get a few months of statements.
Check with your lender to determine the acceptability of assets you intend to use and the requirements. Many lenders may follow the same guidelines, but it’s still best to ask. Best advice, save and then save some more and make sure you can verify all non-work deposits!
Last up of the four C’s of underwriting will be collateral – the house you’re buying or refinancing.