As a mortgage company, we see it all the time, cash funds being used in a purchase mortgage or on a refinance mortgage. People earning non-reported income doing cash side jobs otherwise known as "under the table." These monies are ineligible for use in taking a out a mortgage.
The reason is simple, all lenders today selling loans to Fannie Mae and Freddie Mac have a fiduciary responsibility to the investors on wallsteet market to create and originate mortgage loans with the highest degree of minimized credit risk. Beyond that, regulations imposed on mortgage companies' require them to adhere to strict anti-money laundering policies, making any questions fully documented with a clear and concise trail.
So what's a paper trail anyway?
For mortgage lending purposes, a paper trail clearly shows a beginning point and an end point, it documents on paper how money moves from point A to point Z.
Let's say mom and dad are giving $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 receiver's bank account and from receiver's bank account the money is then wired into escrow. Sounds simple enough right? Well yes and no. The following is typically what's needed to document a paper trail:
- full original bank account statement to show where the money starts
- executed gift letter shows who is giving the money and states relationship between the parties
- bank print out showing the "available" balance including deposit of the gift funds into the buyer's bank account
Some other very common examples of paper trailing include:
- Sourcing of down payment funds in buying a house: -provide the mortgage lender a copy of the earnest money check, both front and back that was made to the title company when the offer was made along with the bank statement showing those funds leaving the original account from whichever account they came from.
- Cash deposits going into a bank account: Using cash deposits on the bank statement, explain where these cash deposits are coming from and if these funds cannot be sourced, the lender will subtract these funds from your cash to close and will disallow the use of these monies.
How to determine which funds need to be paper trailed
Most of the time the following funds do not have to be sourced:
- Funds in account for the last 60 days
- Funds in account which came from normal course of pay stubs/employment
How to document odd ball funds...
-Sale of personal property such as a car, boat, motorcycle etc.- bill of sale executed by both parties clearly showing the purchase price and details of transaction along with the money going into the bank with a copy of the bank statement showing funds as "available".
-Side Cash must be in your bank for 60 days or longer at the minimum.
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 will be well on your way to successfully securing that mortgage.