It’s important that buyers cut the check for their earnest deposit from an account they can trace the funds from. I recently had a transaction where the buyer used a cash gift to buy a cashiers check that was later used for their earnest deposit. This will create problems during the underwriting of your loan, which triggered me to write this post.
WHY DOES IT MATTER?
There are many reasons why the underwriter’s care about proving the source of your deposit. Loan guidelines only allow a buyer’s down payment to come from certain parties. For example, FHA allows a buyer to receive a gifted down payment from a family member. If the earnest deposit check was a cash gift, we cannot tell if the gift was from a friend, which is not allowed. When a gift is given from a family member, lenders will require a bank statement from the buyers account to show the amount of the gift, a bank statement from the donor’s account to show it came from their account, a gift letter stating the deposit is a gift and a copy of the check. All of the amounts should match exactly.
Another reason this is important is because the underwriter needs to make sure the funds did not come from a loan. All funds used towards the transaction should be accounted for. If you did take a loan for the down payment, that is fine for some mortgage programs but the underwriter must know the terms of that loan so they can make sure you qualify for your new loan and your new mortgage.
It’s a small request that can seem petty at the time of request, but there are reasons for these guidelines.
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