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Updated:         June 5, 2018

It is not uncommon in today's transactions for buyers to acquire additional funds for down payment and/or closing costs during the escrow period. Lenders have become increasingly concerned about determining the "source" of all funds identified in the transaction.

The two prime reasons for these "source of funds" requirements are:
1. Federal regulations allow the government to confiscate any property acquired via the use of any funds procured through illegal drug sales. Thus, all money must be verified as having been obtained legally.
2. The funds typically can not be "borrowed" money. It must be determined that the buyer does not have any undeclared debt owed perhaps via a third party (i.e.: relative, friend) who borrowed on a personal loan or credit card, etc. and then "gifted" the money to the buyer.
The most frequent methods of acquiring funds is current savings, gift money from a relative, selling items of value, selling or borrowing against real estate, retirement or 401K accounts and repayment of funds previously loaned. Let's explore each option individually.

GIFT MONEY: Perhaps the most likely source of additional money, the following steps must typically be observed with gift funds.
a. Identify that the donor has the funds available to make the gift.
b. Determine the relationship of the donor to the buyer (generally, the donor is a relative from whom it makes sense a gift would be provided.)
c. Acquire a "gift letter" identifying the source of the money and clearly stating that "the funds need not be repaid".
d. Finally, acquire the donor's check, make a copy of it and make a deposit in one's own account. A "donor" may not want to reveal bank account balances to the lender. As a substitute, they can have their bank draft a letter, on bank letterhead, indicating that the donor had sufficient funds on deposit with which to make the amount of the gift. In this way the donor retains privacy regarding their accounts.

SELLING AN ASSET OF VALUE: (i.e.: vehicle, jewelry, antique): The sale of any asset of "significant" value requires an appraisal having been done prior to the sale. A bill of sale and, in the case of the sale of a vehicle, a DMV transfer will be required. It is important that accumulated cash be "supported" with appropriate documentation. It is advised that you discuss any proposed sale of an asset with your lender prior to sale.

BORROWED MONEY: We indicated above that borrowed funds are normally not acceptable for down payment and closing costs. One major exception is when one borrows from their own "equity"...such as real estate. Additional sources of borrowed money might be from retirement and/ or 401K accounts, stocks and bonds and from cash value residing in an insurance policy. One must verify the funds available and also be qualified to absorb the cost of the loan as part of their debt service ratio. If an IRA account is withdrawn, the tax liability must be deducted at the time of the withdrawal.

REIMBURSEMENT OF A DEBT: The repayment of a loan is acceptable money, but generally a note (evidencing the debt) will be required. Additionally, the lender may seek to verify a transfer of original funds at the time of the initial loan via a copy of the check or bank account statements showing funds available at the time of the loan being made as well as when repayment is made.

CASH ON HAND ("MATTRESS MONEY"): This remains a difficult issue. The newest regulations suggest that "cash on hand" is acceptable but some restrictions apply. The borrower should NOT have a savings or checking account, thus evidencing that they retain cash. The buyer's income need be congruent with their ability to save the amount of cash claimed. There is still little recognition of the fact that some people do retain significant amounts of cash.

CANNABIS FUNDS:           With the legalization of marijuana in California, the obvious question is whether funds from such businesses acceptable when purchasing a home. The issue is so new that there are no goo answers. FHA, VA and USDA loans will definitely NOT ALLOW such funds. These are government agencies and marijuana remain illegal at the Federal level and thus they are unable to approve loans with such funds involved. Mixed messages are received from lenders who sell all mortgages to the secondary market, including Fannie Mae and Freddie Mac. While an owner of a cannabis business is likely to be unable to use income for home financing, a w2 employee MAY be eligible. Every situation will require individual lender approval.

The other difficulty may be where the funds are deposited. Federally regulated banking entities (which include practically all banking establishments) are distancing themselves from knowingly dealing with any “illegal” (by Federal standards) funds. With legalization there is now efforts to establish a State Bank in California where cannabis funds can be deposited and from which depositors can write checks. We do not yet know if this will change the rules by which borrowers can use said funds for home purchasing purposes.


Note: The above is not a legal interpretation of the laws nor should anyone rely upon the information but should acquire their own information regarding their specific situation.


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