You have decided to purchase a home and you have money put aside for this very big event. The money that you have worked so hard to save may be coming from your checking, savings, investment, or retirement accounts. Your lender will need to “source” the funds that you are using and what is going to be needed is very specific.
You will need to show evidence of where the funds are coming from; those specific bank accounts just named. Your lender will be verifying the funds you are using for your down payment, if applicable, and any costs associated with the new loan. Sourcing funds will also include evidence of funds used for earnest money deposits, application or appraisal fees given to your lender, or funds used to pay for homeowner’s insurance prior to closing. What your lender is going to need:
- Your most recent 2 months of complete bank statements for the funds being used, this may include “reserves” – we’ll discuss this in further detail
- Copies of any checks given for earnest money deposits, application fees or appraisal fees, or insurance premiums, if paid for prior to closing
- In addition to providing copies of checks given for the earnest money deposits you will likely need copies of the cancelled checks and bank statements showing the funds clearing your account and what the new balance is. If you are trying to provide evidence of the checks clearing your account but haven’t received your new bank statement you can provide an “activity statement” dated from the previous bank statement cut-off date through the date the check(s) cleared your account – you cannot have any gaps in dates and the figures must balance. The “previous bank statement” refers to bank statements already given to the lender
This can be fussy but in order to not drive yourself crazy keep track of these items, you will need them.
If you are withdrawing funds from an investment or retirement account you will need evidence of the withdrawal and proof of receiving the funds. This will be a copy of the check you receive or evidence of a direct deposit or wire transfer. Your lender will want to see the deposit of these funds into your checking or savings account along with evidence of what the new balance is. This can be a very detailed component and I recommend going over it with your lender to make sure you will have the appropriate paper trail.
There will be some cases where the lender will allow items to be paid for by credit card, i.e., the application or appraisal fee, insurance policy – your lender will let you know if this is acceptable. Paying for your homeowner’s insurance at the time of closing is typically the easiest way to go.
I mentioned earlier that you may need to have evidence of “reserves”. Reserves are accessible funds that you have for a specific number of payments (principal, interest, property taxes, and insurance) – “accessible” being the operative word. These are not funds you need to liquidate for closing but can access should something unexpected take place and your income changes for a short period of time. If applicable, reserves are typically based on the type of loan you are obtaining and if you have any other financed real estate. You will want to ask your lender if reserves are required.
If you are going to receive a “gift” for funds needed toward the closing on your new home you will want to discuss this with your lender up front. Your lender will have a specific protocol for what is needed and you will want to see if there are any “gift” rules for the loan program you will be using.
If you plan to obtain some of the funds needed for the closing during the loan process, such as, payroll or inheritance etc., you will need to track those funds – evidence of the funds as they are received, copies of checks, direct deposit, copies of bank statements – the same process as previously mentioned.
A proration for taxes or property tax credit depending on what state you are in cannot be used up front to evidence the funds you will need at closing. Those credits will be applied at closing, if applicable, but cannot be used to source your funds to close.
If you have shrewdly negotiated your offer so that you are going to receive “seller concessions”, those funds will be immediately shown as a credit toward your cost to do the loan.
All deposits that you have given up front toward the transaction to the seller or lender will be applied toward your down payment or closing costs, however they cannot be applied if the lender doesn’t have the required documentation to “source” the funds. This is critical in order to make sure that you receive the appropriate credit.
These are important details; you do not want to find yourself in a situation where you cannot support having the funds you need to close on your new home.