Home | Closing Funds Requirements
The government sponsored entities (GSE’s) known as Freddie Mac, Fannie Mae, Ginnie Mae, The US Department of Agriculture and the Department of Veteran’s Affairs issue underwriting guidelines for mortgages in the United States. These guidelines are the rules by which banks and mortgage lenders must abide by in order to be able to fund any of the above listed type of mortgages. All GSE’s have similar rules relating to the types of funds that can be used in a real estate transaction. All funds used must either be “sourced” funds or “seasoned” funds. An explanation has been provided below to help you understand which funds can be used and what documentation you can expect to have to provide during the underwriting process.
“Sourced” funds are funds where the origination of these funds has been verified and documented with copies of the deposit instruments (check, money order, wire transfer, direct deposit, etc.) and supporting documentation has been provided (pay stubs, receipts, letters of explanation, etc.). Deposited funds must match the supporting documentation to the exact cent. This means that a borrower who deposits some but not all of their payroll check will encounter difficulty using those funds because the check stup and amount deposited will not match.
Funds used in a real estate transaction must come from accounts such as checking accounts, savings accounts, CD’s, 401k’s and generally any other type of account which is maintained by a financial institution that generates monthly, quarterly or annual statements. Additionally, the origin of these funds must meet the guidelines as having come from a source acceptable by the federal underwriting guidelines such as employment compensation, gifted funds, funds collected used from the sale of an asset, tax refunds, etc.
Cash deposits will not be accepted unless clear evidence of the source is also provided (for example: the sale of a vehicle where the purchaser pays for the vehicle in cash and a receipt for cash is issued and a DMV transfer for the matching purchase price is provided with a letter of explanation). Consumers who want to use cash in a real estate transaction must deposit that cash into an account and let those funds remain in the account until they are “seasoned” as described below.
In addition to funds maintained in the aforementioned account types, the GSE’s allow “gift funds” to be used in a real estate transaction under certain restrictions. All gift funds must be “sourced” by the gift giver. Sourcing funds requires a copy of the gifting party’s bank statement immediately prior to the gift to document that gifting party had the funds on deposit with that financial institution immediately prior to gift. If the gifting party’s beginning balance is equal to or greater than the gift amount with no deposits made to maintain that balance, the gifting party will not have to “source” any of their deposits. However, if the gifting party requires deposits into their account in order to maintain the minimum balance needed for the gift, they will also have to “source” any deposits.
“Seasoned” funds are funds that have been on deposit in an acceptable account for at least two full banking statement cycles. “Seasoned” funds do not have to be “sourced” beyond providing statements from the financial institution for which they are on deposit. Seasoning requirements (with few exceptions) are two months of bank statements immediately prior to the mortgage application that do not show the funds being deposited and one month for gift givers that do not show the funds deposited. This means that a borrower cannot deposit cash into an account the month before the mortgage application and be able to use that cash, now on deposit, in a real estate transaction.