Understanding a Paper Trail
What funds are eligible for use in a Mortgage Loan?
As a mortgage broker, we sometimes see cash funds being used in consideration on a purchase mortgage or on a home refinance. People earning non-reported money doing cash side jobs otherwise known as money “under the table.” These funds are ineligible as consideration for procuring a home loan.
The reason is simple, all mortgage lenders today selling loans that Fannie Mae and Freddie Mac have a fiduciary responsibility to the investors in the secondary market to create and originate mortgage loans with the highest degree of minimal credit risk. Beyond that, the government regulations imposed on mortgage brokers and lenders today require them to adhere to strict anti-money laundering policies, as such, all funds in accordance with reserves or cash to close must be documented and sourced.
What is a paper trail anyway?
For mortgage lending purposes, a paper trail clearly shows a beginning point and end and it documents how the money moves from point A to point Z.
For example: Let’s say your parents are giving you a gift of $10,000 to purchase a home. To create a sufficient paper trail, the flow would look something like this:
- Money originates in your parents’ bank account
- Money is transferred from parents’ bank account to your bank account
- From your bank account the money is then wired into escrow
Sounds simple enough – However, the following is typically what is required to document a paper trail for the purposes of securing a home loan:
- Bank account statement (all numbered pages) showing the source of funds
- Executed gift letter showing donor name and the relationship between the parties
- Bank account print out showing the “available” deposit of the gift funds into your bank account
Some other quite common examples of paper trailing include:
So how do you know what funds need to be paper trailed or not?
Most of the time the following funds do not have to be sourced:
Assets from your bank account(s) where the funds have been seasoned for at least the last 60 days.
Assets from your bank account(s) from your income, such as from your paychecks.
How to document non-standard funds?
- Sale of personal property, such as a car, boat, motorcycle etc. can be documented with a bill of sale executed by both parties clearly showing the purchase price and all the components of the transaction along with the money going into your bank account with a copy of the bank statement showing those funds as “available”.
- Side Cash must be in your bank account for a period of 60 days for these funds to be considered seasoned and generally no paper trail will be required.
- Cash deposits by paying someone else’s debt such as an auto loan can be sourced so long as the person making the monthly payment consistently pays the monthly debt obligation in one form, meaning every month the debt obligation is paid by cash alone or by a payment directly to the creditor. It gets challenging to be able to accurately document when the obligation is paid erratically in a combination of cash and credit.
- Business funds deposited into a bank account will cause the mortgage broker or lender to require a letter from a tax professional stating the borrower’s business will not be negatively impacted by the co-mingling or use of business funds in consideration for securing a mortgage, along with the bank statements and general paper trail.
Nowadays, qualifying for mortgage loan leaves no stone unturned if they are turned over the right way. By ensuring that all funds are properly documented – you will be well on your way to successfully securing your home loan.
