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!
6 Responses
THANK YOU, Now I have a question that came up on verifying donors gift funds.
When the donor sends in a bank statement showing that they have the funds to give or had the funds to give and there are large deposits showing on their statement are we required to verify any information on the large deposit on a donor bank statements?
thank you
DEB
Thanks for the question, for conventional loans you do not have to verify the donor ability to give the funds. For that reason large deposits should not be questioned, if the agencies wanted the source scrutinized they would required donor ability like the govie loans do. My advice is not to turn in any more then the cancelled check from the donor on a conventional file.
Thanks!
I love your blog, it really helps me quickly to stay current on underwriting updates that are coming out more frequently than ever before.
Will C.
UWM
Thanks for the feedback Will!
Respectfully, your scenario in which you would not question a large deposit if it was labeled “counter deposit” seems to leave open the very real possibility that the counter deposit was a gift. A gift that could be prohibited based on the transaction; such as on an investment property, or be from an unacceptable donor. Yes, technically the guideline cited only talks about determining whether the deposit is borrowed funds, but I think prudent underwriting would dictate that you must know more about the source of that large deposit than just whether it is borrowed. I realize that gifts that aren’t considered “large” could occur without detection, but obviously there is likely increased risk associated with an unacceptable gift that is a “large deposit”; otherwise gifting would be allowed from anyone, and on any sort of transaction.
Hi Reid
Thanks for the response, I agree with your point about gifts possibly being in the account. Part of me would want to ask about a large deposit (due to gift or otherwise) but as I pointed out in the blog it comes back to what is stated in the guidelines (again this is only if your selling directly to FNMA). But taking your example, first if it is a gift there is no repayment so that is the main concern FNMA has is borrowers have debts not reported, not so much that the borrowers have funds not sourced. Second, gifts are allowed on primary and second/vacation homes so if it is a gift , no harm no foul here. For a non owner occupied loan and the funds from the large deposit where needed…. I agree with you and probably would just ask about the source. I don’t think the guidelines require it but since gift funds are not eligible for NOO transactions it would be worth the question.
I would throw in that if FNMA sent an audit back stating “why was the large deposit not sourced on this refinance” my answer would be, “please see FNMA B3 4.2-02 and the guidance stated which is “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 ” I spent a few years as a recourse auditor (and supervisor) and one thing I can tell you is FNMA will hold the guidelines very closely even if it means they are on the losing end of the discussion.
Thanks for the comments and feedback!