A few days ago I received a question about how to handle large deposits when the transaction is a refinance on a FNMA conventional loan. The question specifically asked if it was okay just to “back out” the large deposit from the bank account and not ask about the source.
I think the answer surprised the client who sent in the question, my response was “Do nothing, unless you have evidence the money is borrowed”. That’s right, no reason to ask about the deposit, source of the deposit, or remove the deposit.
For FNMA here is the supporting guideline.
FNMA B3-4.2-02 Depository Accounts
Evaluating Large Deposits
When bank statements (typically covering the most recent two months) are used, the lender must evaluate large deposits, which are defined as a single deposit that exceeds 50% of the total monthly qualifying income for the loan. Requirements for evaluating large deposits vary based on the transaction type, as shown below.
Refinance transactions Documentation or explanation for large deposits is not required; however, the lender remains responsible for ensuring that any borrowed funds, including any related liability, are considered.
The question then became “how do I tell if the money is borrowed”, my advice is to review the bank statement with the following in mind. Only ask about deposits on the bank statement that appear to be from either credit cards, 401K accounts, or cash advances. For example, if the bank statement shows “counter deposit” I would not be concerned about the deposit. If the statement showed “Note Loan CU” as the entry, I might ask about that one. It is hard to give specific examples so my best advice is to use your experience and judgment to look for tings that could be new debts and not be concerned with the borrower moving money.
My guess is FNMA takes this position because it would not make financial sense for someone to borrower money from a credit card, 401K loan, or note loan at a higher rate just to lower a mortgage balance on a new loan which more than likely has a lower rate and will be tax deductible.
Thanks for the question, I hope this blog helps out some other people who may have the same question in mind!