After months of searching, planning and saving, you’re finally ready to apply for a mortgage. You believe you have everything under control because you have excellent credit and a stellar track record of on-time loan payments.
But there’s one small hiccup. A lender noticed that you’ve had a recent, slightly unusual cash deposit in your bank account. Even though the cash deposit is perfectly explainable, it still stalls the mortgage process.
What is the meaning of a cash deposit for a mortgage? You should record any recent deposits made to your bank account as soon as possible. Therefore, be sure to understand how a cash deposit may affect your mortgage application before you even begin the process.
Buying a home is a significant financial decision, and making a large down payment can be a smart way to reduce your mortgage costs and build equity. However if you’re planning on making a large deposit it’s important to understand how lenders view these deposits and how they can impact your mortgage approval.
What is Considered a Large Deposit?
A large deposit is any deposit that exceeds a certain threshold, which can vary depending on the lender. Generally, a deposit is considered large if it exceeds 50% of your monthly gross income. For example, if your monthly gross income is $5,000, a deposit of $2,500 or more would be considered large.
Here are some other factors that can influence what is considered a large deposit:
- The type of loan you are applying for: Some loans, such as FHA loans, have stricter guidelines for large deposits.
- The amount of your down payment: If you are making a smaller down payment, a large deposit may be more likely to raise red flags.
- Your credit history: If you have a good credit history, lenders may be more lenient with large deposits.
Why Do Lenders Care About Large Deposits?
Lenders care about large deposits because they want to make sure that you can afford the mortgage payments. If you have to borrow money to make a large down payment, it could be a sign that you are overextending yourself financially. This could increase your risk of defaulting on the loan.
How to Explain a Large Deposit
If you are making a large deposit, you will need to be prepared to explain the source of the funds to your lender. This may involve providing documentation, such as:
- Bank statements: These will show the origin of the deposit and any transfers that may have occurred.
- Gift letter: If the money was a gift, you will need a letter from the gift giver stating the amount of the gift and that it was not a loan.
- Sales receipt: If the money came from the sale of an asset, you will need a receipt for the sale.
What Happens if I Can’t Explain a Large Deposit?
If you cannot explain the source of a large deposit, your lender may not approve your mortgage. In some cases, they may ask you to wait until the deposit has been in your account for a certain period of time before they will approve your loan.
Tips for Avoiding Problems with Large Deposits
- Plan ahead: If you know you will be making a large deposit, talk to your lender beforehand to see what documentation they will require.
- Keep your bank statements organized: This will make it easier to track the source of any large deposits.
- Be honest with your lender: If you are asked about a large deposit, be honest about the source of the funds.
Making a large deposit can be a great way to improve your chances of getting a mortgage and reduce your monthly payments. However, it’s important to understand how lenders view large deposits and be prepared to explain the source of the funds. By following the tips above, you can avoid any problems with large deposits and get your mortgage approved quickly and easily.
Additional Resources
- What Are “Large Deposits” & How Do I Have Them “Sourced?” – Range Lending
- What You Should Know Before Making Large Deposits While Buying a Home – Livian Estates
Frequently Asked Questions
Q: What is the definition of a large deposit?
A: A large deposit is any deposit that exceeds 50% of your monthly gross income.
Q: Why do lenders care about large deposits?
A: Large deposits are important to lenders because it shows them that you can afford the mortgage payments. Making a sizable down payment with a loan could indicate that you are pushing yourself too far financially.
Q: How can I explain a large deposit to my lender?
A: You can explain a large deposit to your lender by providing documentation, such as bank statements, a gift letter, or a sales receipt.
Q: What happens if I can’t explain a large deposit?
A large deposit may not be approved for your mortgage by your lender if you are unable to provide an explanation for it. In certain instances, they might request that you hold off on approving your loan until after the deposit has been in your account for a predetermined amount of time.
Q: How can I avoid problems with large deposits?
A: You can avoid problems with large deposits by planning ahead, keeping your bank statements organized, and being honest with your lender.
Disclaimer
This article is for informational purposes only and should not be considered financial advice. Please consult with a qualified financial professional before making any financial decisions.
What is a Cash Deposit?
Any amount of money deposited into your checking or savings account and transferred to your bank account is known as a cash deposit. This could be either a check, a transfer or actual cash. Money that is directly deposited into your bank account or that has been wired to you is regarded as a cash deposit.
What Is Considered a Large Deposit for a Mortgage?
Usually, what matters is not how big the deposit is, but rather if it looks out of the ordinary for your account. For instance, the bank probably won’t raise any red flags if you consistently maintain a $100,000 balance in your account and occasionally receive deposits of $5,000. If, however, your regular balance was $1,000 and you suddenly receive a $5,000 deposit, you may need to make some explanations.
This is a general guideline that you should abide by: if your deposit exceeds 25% of your monthly income, it will likely raise eyebrows. If you make $20 an hour, you earn $41,600 annually without overtime. That’s about $3,450 a month, so lenders may look into a deposit of more than $866 if it has nothing to do with your regular income.
Naturally, you are exempt from having to provide an explanation for routine deposits, such as child support or clearly indicated income that you have previously reported on your mortgage application. Additionally, since deposits like your tax refund are indicated clearly on your statement, you won’t have to explain them. What mortgage companies will ask about are large cash deposits. When it comes to a sizable, unusual deposit, a mortgage company usually wants documentation of whether the deposit is compliant with the loan program you are approved for, whether it was a gift for your down payment, or whether it was a loan that must be factored into your debt to income ratio.