When you hear and read news accounts that report “credit is tighter,” they’re often referring to the requirements surrounding the “sourcing” or verification of the funds that will be used for a down payment or closing costs.

When you take out a loan, the standard guideline is the funds you’ll use for closing should be in your savings or checking account for two months prior to closing. So if you’re purchasing a home that would mean you need the money covering the 20% down payment and the closing costs in your bank account for at least two months. For a refinance, you may need a few thousand dollars in your account for that time period.

When the lender sources your funds, they want to know where the money is coming from. And they want to make sure it’s coming from you and not someone else. So if any large deposits are placed into your account outside of your normal income, the lender (in other words, the underwriter) needs to know the source of this money.

There are several reasons why the underwriter needs to know where your funds are coming from:

1. The funds have to be from an “allowable” source according to loan guidelines. For example, FHA allows you to receive a gifted down payment from a family member. However, a gift of funds from a non-family member may not be allowed. Either way, the gift must be sourced or verified. The underwriter will require bank statements from your account and the donor’s account, as well as a copy of the check and a letter stating the deposit was a gift. All of the amounts on all documentation should match exactly.
2. The underwriter wants to ensure that you didn’t borrow money to buy a house. While some mortgage programs may allow you to take out a loan for your down payment, the underwriter needs to know the terms, balance and payment of that loan. This loan amount must be calculated in your debt ratio, so the underwriter can ensure you qualify for your new mortgage loan.
3. The underwriter wants to know if the money is coming from an account that you jointly share with someone else. If so, you have to provide written consent from the other account holder that you can use the money from that account for a down payment.
4. The underwriter wants to make sure you have enough money for closing. It can be a waste of everyone’s time, money and energy to get all the way to closing to find out you don’t have enough money to close.

While the underwriter’s requests may seem petty to you, they’re really not. It’s in your best interest to provide all the documentation your lender requires to source your loan.

If you have any questions about sourcing your loan funds, talk to the mortgage specialists at Grandview Lending. We can help you understand the requirements for taking out your loan.