The blogs that come most easily are directly inspired by questions or concerns voiced by actual mortgage clients…. Unfortunately this one came from a complaint. I hate complaints, they are Kryptonite to businesses that work off referrals.
This one could not be avoided. A mom was giving her daughter a ‘gift’ of money (I intentionally avoid using the word ‘cash’) to use as a down payment for a house; this happens all the time. The underwriter was asking for the ‘source account’ for the funds, meaning she needed to see the account- of the mothers- that the gift funds were coming from. The mother’s complaint was that this was an invasion of her privacy, and I agreed with her but explained that it was unavoidable. She was not pleased.
The USA PATRIOT act (fun fact, its title is actually an acronym for ‘Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism’) was signed into law by GW Bush on October 26 2001. Like other laws that were rushed through congress as a result of extreme circumstances (Dodd- Frank anyone?) facing our government it is likely that many never read it or fully understood its significance on everyday life. My life. Every day.
Ever hear the expression ‘cash is king’? In my business, cash is the worst thing you can bring to a mortgage transaction. As a result of the Patriot Act- in unison with other anti-money laundering legislation- any large deposits (for our purposes any deposit that is roughly 25% or more of the borrowers gross monthly income) appearing on a borrowers bank statement needs to be ‘sourced and seasoned’, which means an indisputable paper trail. For many of us this is not a problem; with few small exceptions any funds my wife or I deposit are some type of check, usually a paycheck. I don’t have a hobby of fixing cars or building decks, nor do I own investment properties for which I get paid rent in cash, but I have found out- the hard way- that many people DO. Cash that cannot be sourced cannot be used in ANY part of a mortgage transaction- it can’t be used for a down payment, nor can it be used to pay off debt to help qualify for a mortgage. This would also be a smack in the face to those who cash their paychecks every week, put some ‘fun money’ in their pocket, and deposit the random cash that is left, which can no longer be matched up to a paystub or to last week’s paycheck. Many lower income homebuyers who need these extra funds the MOST cannot use them, and although I generally support legislation that keeps our populace safe this seems unfair.
Unfortunately this is a concept people do not seem able to grasp because it is somewhat anathema (see ‘cash is king’ above) to what we have all learned over the years. Whenever I meet with prospective homebuyers I EMPHASIZE this as a potential issue, and IMPLORE them not to deposit large sums of cash, but many invariably do. I can almost picture someone dropping $10,000 of ‘under the bed’ money into their bank account thinking ‘Just let them TRY and tell me I can’t buy a house- I GOT CASH!’
The other side of this coin, as mentioned above, are the funds that are frequently gifted, by a parent or other close relative, to help with the down payment. Although the gift giver is not buying the house, they are now subject to the same scrutiny- in terms of sourcing funds- as the home buyer. (Great link about this: http://money.usnews.com/money/personal-finance/articles/2013/09/12/what-to-know-before-gifting-a-down-payment). It is rare but I have had situations where the gift offer suddenly dried up when the giver becomes aware of the paperwork requirements.
There are ways to manage this process, (ie since underwriting guidelines only require a 60 day paper trail the gift can be deposited 90 days prior to the purchase) as well as other subtleties, but (here it comes) making a connection with a knowledgeable and experienced loan professional, BEFORE you start the process, is probably the best way to avoid or anticipate problems of this nature. I find it ironic that the people that are scrimping and saving and working 2-3 jobs to achieve the dream of owning a home are stymied by something called the Patriot Act; what could be more American than that?