(Oct. 16, 2020) Cash may be king in a sellers’ market, but buyers need to understand that the same is not true with financial institutions.
So, if you don’t have all of the cash funds readily available already in a banking institution and need to get a mortgage, buyers should have a strong understanding of how lenders treat deposits.
You can get cash from anywhere and deposit it into your account. But, when purchasing a home, you will have to prove that you received the cash through legal sources and that it is in fact your income versus a loan.
Accordingly, the lenders will verify any money you have on hand (in addition to your income).
In addition, if you have any cash deposits that are actually loans, these get added to your debt-to-income ratio (your income compared to your expenses ratio).
Down-payment gifts are allowed by most lenders — you may just have to prove that it is a gift and not a debt that you would need to repay.
It can be difficult to prove where cash deposits came from, but some ways include a gift letter signed by all parties, including the donor and receiver.
Fortunately, lenders only review the last 60 days of transactions in your account, so deposits prior to that time do not usually need to be accounted for.
Deposits of $10,000 or more will have to be reported to the IRS whenever they take place.
If the source of a cash deposit will be difficult to prove, you may be better off not depositing the money. And, if you are unsure of the situation with the money you are hoping to deposit, check with your lender before putting it into your account.
Although utilizing cash deposits when buying a home is not forbidden, they may present some challenges so it’s essential to understand the importance of always having documentation of the source of the funds when using cash.
— Lauren Bunting is a licensed Associate Broker with Atlantic Shores Sotheby’s International Realty in Ocean City.