SOURCING THE FUNDS -
WHAT DOES IT MEAN?
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
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
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.