When you apply for a mortgage loan, your lender will take a careful look at your finances. This includes studying how your gross monthly income compares to your monthly debt obligations. It includes running your credit to determine how well you've managed your money in the past. And it includes tracking any large deposits that you've recently made in your bank account. If you deposited $5,000 in your bank account three days before applying for a mortgage loan, your lender will want to know why you're suddenly flush with cash.
TL;DR (Too Long; Didn't Read)
If a borrower makes a large deposit just prior to applying for a mortgage, it could raise a red flag that the lender borrowed the money from someone to boost his financial health temporarily to cover his down payment instead of having sufficient monthly income on his own.
Potential Red Flag Large Deposits
Mortgage lenders want to loan money to borrowers most likely to pay their mortgages on time. That usually means borrowers who receive a reliable stream of income each month. When lenders see that you've deposited a large sum of money into your account before applying for a loan, they become suspicious that you might not normally have enough money in your account to handle the payments that come with the mortgage loan you are seeking. If the majority of your savings were deposited into your bank account just days before you apply for a mortgage loan, your lender will wonder if you are receiving an emergency loan from someone to make it look like your finances are stronger than they are.
The Paper Trail
When lenders see a large deposit -- typically larger than $1,000 -- they will want to see documentation tracing its origins. If you sold a second car that you no longer need for $5,000 and then deposited that money in your savings account, you'll need to produce a receipt from that sale. Lenders won't place as much weight on that one-time injection of cash when determining how large of a mortgage you can afford.
Lenders instead focus on income streams that come into your household each month when deciding whether you can afford a specific mortgage payment. This makes sense; you won't be able to sell a car every month to be able to pay your mortgage bill.
Seasoned Money is Okay
You won't, though, have to justify large deposits that are seasoned. Seasoned money when it comes to mortgage lending refers to dollars that have been in your bank account for at least two or three months. When you apply for a mortgage, your lender will ask you to provide copies of your last two to three months' savings and checking account statements. If you made your large deposit more than two or three months ago, your lender obviously won't see a record of this cash infusion, and won't, then, ask you for paperwork to track its origin.
What Lenders Want From You
What lenders really want to see from their borrowers isn't a sudden influx of cash into their account. They like to see proof of what's called the "28/36 Rule," which means that a household's total housing costs total 28 percent of gross monthly income and 36 percent on other debts, including car payments and credit card obligations. Lenders consider these to be stable borrowers. If they see large deposits, they may worry that the borrowers are overextending themselves with loans from friends or family that they'll have to pay back.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.