If your buyer clients are planning to finance the purchase of their home, they must document the assets they bring to the transaction.
This is to prove to the lender that they have the money to pay closing costs on the day the loan funds and cover their financial obligations, says Matt Kiker, Vice President of the Texas Mortgage Bankers Association.
It’s not enough for your buyer clients to have the money; the money needs to be deposited in a financial institution or otherwise traceable.
“The main reason is that, if the money comes out of thin air, we don’t know where it came from,” he says, adding the money could have been obtained through illegal means.
Two common examples of this are so-called mattress money and gifts.
Mattress money refers to funds without any kind of documentation—as if it were cash that was stored in a mattress, Kiker explains. Mattress money cannot be used for a downpayment or to pay other expenses associated with the transaction. There is an allowance for some FHA programs that will allow for “cash on hand” to be deposited into a financial institution before closing; however, the borrower would need to meet the requirements of a cash-on-hand borrower.
Any financial gifts your buyer client receives must be documented as part of the buyer’s assets. This is typically done through a gift letter from the donor, and in most cases, proof of the donor’s funding source, he says.
Mortgage professionals only need to see enough of your clients’ finances to prove they can afford what they’re trying to buy and have any cash reserves that may be required for the loan program. Side businesses with separate taxable income need not factor into the real estate transaction, although side businesses with a loss may need to be factored in on government-insured loans.
Much of the financial review process can be done electronically these days, Kiker says.
“We can see how much they have in the bank and look at the other documentation,” he says. “If we see something about the deposits that isn’t consistent, we would need to get that documented. If an unusual deposit shows up and we don’t know why, we ask.”