|The importance of paper trails for home mortgages
As mortgage lenders, we see it all the time – cash funds being used in consideration on a purchase mortgage or on a home refinance. People earning non-reported money doing cash side jobs otherwise known as money “under the table.” These funds are ineligible as consideration for procuring a home loan.
The reason is simple. All mortgage lenders today selling loans have a fiduciary responsibility to the investors in the secondary market to create and originate mortgage loans with the highest degree of minimal credit risk. Beyond that, the government regulations imposed on mortgage lenders today require them to adhere to strict anti-money laundering policies. As such, all funds in accordance for reserves or cash to close must be documented and sourced.
So what’s a paper trail anyway?
For mortgage lending purposes, a paper trail clearly shows a beginning point and an end point, and it documents how the money moves from point A to point Z.
For example, let’s say mom and dad are giving you a gift of $10,000 to purchase a home. The $10,000 in order to create a sufficient paper trail would look something like this: money originates in mom and dad’s bank account, money is transferred from mom and dad’s bank account to your bank account, and from your bank account the money is then wired into escrow.
Sounds simple enough right? Well it is and it isn’t. The following is typically what’s needed to document a paper trail for the purposes of securing a home loan:
1. Full original bank account statement to show where the money begins.
2. Executed gift letter shows who’s giving the money and states the relationship between the parties.
3. Bank printout showing the “available” deposit of the gift funds into your bank account.
Some other very common examples of paper trailing include:
• Sourcing of down payment funds in buying a home: how to do this – provide the mortgage lender a copy of the earnest money check, both front and back you made to the title company when you made an offer to purchase the home along with the bank statement showing those funds leaving your account from whichever account they came from.
• Cash deposits going into a bank account: this will definitely be questioned and scrutinized during the mortgage loan process. If you’re using cash deposits on the bank statement, you will need to explain to the mortgage lender where these cash deposits are coming from. If these funds cannot be sourced, the lender will subtract these funds from your reserves or cash to close and will disallow the use of these monies.
So how do you know what funds need to be paper trailed or not?
Most of the time the following funds do not have to be sourced:
• Assets in any form of a bank account that are solely your funds where the funds have been for the last 60 days.
• Assets you have in your bank account coming in the form of your income, such as from your paycheck.
How to document odd ball funds:
• Sale of personal property such as a car, boat, motorcycle etc. can be documented with a bill of sale executed by both parties clearly showing the purchase price and all the components of the transaction along with the money going into your bank account with a copy of the bank statement showing those funds as “available.”
• Side cash must be in your bank account for a period of 60 days in order for these funds to be considered seasoned.
Generally no paper trail will be required.
• Cash deposits by paying someone else’s debt such as an auto loan can be sourced so long as the person making the monthly payment consistently pays the monthly debt obligation in one form, meaning every month the debt obligation is paid by cash alone or by a payment directly to the creditor. This gets challenging to be able to accurately document when the obligation is paid erratically in a combination of cash and credit.
• Business funds deposited into a bank account will cause the mortgage lender to require a letter from a tax professional stating the borrower’s business will not be negatively impacted by the co-mingling or use of business funds in consideration for securing a mortgage, along with the bank statements and general paper trail. Qualifying for mortgage loan financing today leaves no stone unturned.
As long as they’re turned over the right way, by making sure all monies are documented, you’ll be well on your way to successfully securing that home loan.
If you are trying to secure mortgage loan financing and have a question about whether or not the money you have is eligible for use, feel free to send us an e-mail firstname.lastname@example.org. It’s a much easier conversation to handle the paper trailing upfront than it is to be dealing with it after the fact. Start by “Understanding A Paper Trail: What Funds Are Eligible For Use In A Mortgage Loan.”
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.