Perhaps our biggest transactional issue today relates to buyer financing. Not only are lenders more cautious, but the rules keep changing and each underwriter is different. The process is often unpredictable. One lender wants you to provide three months of account statements, pat your belly and rub your head, walk while you chew gum, and provide a letter from your high school algebra teacher confirming that you in fact sat at the "cool kids" lunch table. Another will request four months of statements, seventeen years of uninterupted employment with the same company, and an essay comparing and contrasting the emerging popularity of wind as a clean, alternative energy source and Lady Gaga.
Equally challenging is preparing our clients for the underwriting process. Most of our clients have been through a home purchase and the attendant financing hurdles some time in the past, but most often those experiences of yore do not jibe with todays realities.
This morning, we bring you this guest post from Mortgage Banker and Broker Shanne Sleder from The Mortgage Planners in which he talks about the dreaded verification of deposits during the underwriting process.
As a San Diego Mortgage Banker and Broker I often get asked, “What are the most common challenges that you face during loan underwriting?” Every transaction and client is unique and with today’s underwriting we can see challenges with appraisals, self employed borrowers, and verification of funds.
I would like to focus on the most common challenge I’ve experienced lately, which is the verification of a buyer’s funds for down payment and the deposits that appear on the client’s statement. In order to verify that the client has enough funds to close escrow we must submit statements from their accounts. Any “large” deposits must be documented with a paper trail showing where that deposit originated from and its purpose. I have the word large in quotations because the definition of large is left up to the underwriter’s discretion. A large deposit may be $4,000 or it may be as little as $1,500. I recently closed a transaction in which the clients made $15,000 a month and the underwriter called a $1,700 deposit large. In my opinion, $1,700 is not a large deposit to someone who is making $15,000 a month. Since we do not know what the underwriter is going to consider large, we must gather documentation for any deposit over $1,000. If the deposits are direct deposits from your employer, these will not need to be documented.
Let’s look at a recent example from a purchase transaction I just closed in San Diego. I received a bank statement from the client that supported the cash needed to close, but the statement showed a number of deposits. One deposit was $55,000. I knew we would need to document this deposit. When I asked for the documentation of this deposit I found that it was a combination of two deposits. One was a $50,000 check from the client’s company account that would be used for the down payment and the other was a $5,000 check from a friend. The $5,000 was repayment of a personal loan that my client had made to his friend a couple years prior. My processor and I documented the deposits with copies of the cleared checks and a letter of explanation regarding the payback of the personal loan. Traditionally, we would prefer that deposits of this size be made separately and that any deposit of an unusual nature be mentioned to us as the lender prior to it being deposited. Unfortunately, this deposit had already been made and due to a short escrow period we could not wait for a new statement excluding the large deposit. Feeling we had documented this deposit properly, we submitted the statement and deposit paper trail to the underwriter.
We received a conditional approval from the underwriter with only one condition. It stated we needed to verify the personal loan by submitting a copy of the check my client gave to his friend 2 years earlier. If we could provide that check the loan would be approved and we could get loan documents; if we could not, the loan would be denied. We were somewhat surprised that we needed to supply proof of the original loan from 2 years earlier, but the real problem became apparent when we learned that the original loan was in cash and we could not document it. This one condition was going to kill the transaction, even though the client did not need this $5,000 to close the transaction. After a few days of pleading my case with the underwriter to no avail, I was able to get a hold of an underwriting manager who overruled the underwriter and gave me an exception to ignore the $5,000 because it was not needed for the down payment. We were then able to close this transaction.
Here are the key points to this story: Never deposit large sums of cash into your account. Since there is no way to document where these funds came from, it could cause the loan to be denied. If you are going to lend large amounts of money to a friend, document it and do not give it in cash. These days’ underwriters are being very picky about deposits, so think twice before you cash that check. If you are in the middle of a transaction, talk with your lender first and if you can’t document where the deposit came from or if it is unusual, do not make the deposit. If these simple tips are followed your loan will go much smoother.