It’s no secret that mortgages are costly loans that take years to pay off. Therefore, when going through the steps to apply for a home mortgage, the lender will be on the lookout for all your recent financial movements before approving your request. Although cash is a valid alternative for payment, it can also make them suspicious when a large amount is involved, and stop the mortgage process.
Lenders are interested in you applying for a mortgage. Still, they are also interested in you being a creditworthy person and having the financial ability to take on that financial responsibility. Therefore, it is essential to keep in mind that if you make a cash deposit, you must have a way to explain where the money is coming from. Here we show you how to do it.
How to explain a cash deposit for a mortgage?
A lender needs only one thing: that the client can meet the monthly payments during the whole life of the mortgage. Therefore, that will make sure to financially evaluate well their candidates. They will review the credit history and consider each step before granting the loan.
In addition to verifying that the money has a legitimate source, it is also essential to verify that the amount does not come from another loan. The idea is that the deposit is part of the savings of the interested parties, and they can justify it.
Now, how to explain a cash deposit for a mortgage? Here are our recommendations:
- Show invoices that justify the income.
- Present a report of sale of some goods or real estate that serves as support for that sum of money.
- In case it is a gift, a letter signed and sealed by the owner explaining the reasons for the present, the amount, and where it is clear that you do not need to pay back the money.
- Payments for work as an employee or self-employed.
It is necessary to have one of these documents to answer the lender’s questions and thus, clear any doubts about your payment process. It is essential to consider that, depending on how you present your justification, they can approve or deny your credit.
The best alternative is to refrain from depositing cash amounts that are difficult to prove, but keep in mind that you will not be able to use these funds after the mortgage has been approved.
How do I write a letter of explanation for a large deposit?
One of the alternatives where most clients fall before the lenders is when it comes to justifying money given as a gift. As we have previously mentioned, the way to respond to them is with an explanatory letter. The holder explains the reasons for the present, the amount and argues that it is not necessary to pay back the money.
The idea of “not paying back the money” is fundamental in the letter to avoid inconveniences. Otherwise, it could be considered a loan, which would lead to the absolute disqualification of the mortgage.
To write an explanatory letter correctly, follow these steps:
- Date in which the letter is written.
- Name of the lender.
- Lender’s mailing address and telephone number.
- Name and identification number of the person who gave the money and the same information for the recipient.
- Two paragraphs, addressing all the information requested by the lender: detail dates, account numbers, dollar amounts and more.
- Make sure these paragraphs clarify the idea of the gift and clears any lending intentions.
- You could add copies of the identification documents of both holder and recipient to have more support.
An added bonus for your letter to be practical is that it should be brief, informative and easy to understand. Avoid long-winded sentences and get to the point. Be very detailed in all possible aspects and avoid leaving ideas hanging in the air.
Finally, you should know that gifts in terms of money are accepted only when it comes to families. A lender will accept if it comes from parents, siblings, aunts, uncles, grandparents, in-laws or any other family member.
Those “gifts” that come through people with mortgage interests will be denied. These may be a home seller, a builder or a real estate agent.
What is considered a cash deposit for a mortgage?
Any amount that is made through a financial institution can be considered cash. These are the most common ways in which you should have support:
- Automated Teller Machine (ATM).
- Deposit through a local bank.
- Transfer by online banking.
Any of these three alternatives is considered a cash deposit that could hurt your mortgage application. Before any of them, try to have the necessary support to avoid questions and doubts from your lender.
Remember that their fundamental role is to verify that your money is legal or does not come from another loan.