Making a large down payment when buying a home can be a great financial move. It allows you to build instant equity, avoid paying private mortgage insurance, and potentially qualify for better loan terms. However, plunking down a sizable chunk of cash as part of your down payment can also raise red flags with lenders if not handled properly. So what exactly constitutes a “large deposit” when applying for a mortgage, and how can you avoid potential issues?
What is a Large Deposit?
What is considered a large deposit varies from person to person and depends on their personal financial situation. However, most lenders will only accept a deposit that is more than 200% of your monthly gross income.
For example:
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If your monthly gross income is $5000, a deposit over $2,500 would be considered large.
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If your monthly gross income is $10,000, a deposit over $5,000 would be flagged
Other factors lenders consider when evaluating deposit size:
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Loan type – FHA loans have stricter guidelines, so a large deposit threshold may be lower.
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Down payment amount – Smaller down payments mean deposits are scrutinized more heavily.
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Credit history – Applicants with excellent credit may get more leeway.
The bottom line is lenders want to verify any unusually large deposits that do not align with your typical income and spending patterns.
Why Do Lenders Care About Large Deposits?
Lenders want to make sure you can really pay the monthly mortgage payments. A large, unexplained deposit could indicate:
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You borrowed money you now have to repay. This additional monthly debt obligation could jeopardize your ability to handle the mortgage payment.
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The money is not really yours. Lenders need to be sure that the money comes from a good source and that you won’t have to pay it back later.
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You are trying to artificially inflate your financial profile to qualify for a larger loan than you can reasonably afford.
Documenting the Source of Large Deposits
If you make a sizable deposit, be prepared to provide documentation proving where the money came from. Typical documentation includes:
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Bank statements – Highlight transfers and withdrawals that correspond to the deposit amount.
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Gift letter – Required if funds are a gift, stating amount and that repayment is not expected.
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Receipts – For sale of assets, provide documentation like a car title transfer.
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Canceled checks – Provide copies of checks making up the deposit total.
Documenting every source of funds is mandatory. If you cannot adequately explain a large deposit’s origins, it could derail your loan approval.
What Happens if a Large Deposit is Not Documented?
If you fail to document a mysterious large deposit, several things could happen:
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Loan denial – Lender cannot validate source of funds.
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Delay closing – Lender asks you to wait until deposit is “seasoned” in account for 2-3 months.
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Higher interest rate – Lender views you as higher risk so charges you more.
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Lower loan amount – Lender lends less than you requested due to unverified funds.
The lender needs to check every box when underwriting your loan. If you cannot explain a large deposit to their satisfaction, it throws up red flags that can seriously impact the loan approval process.
Tips for Avoiding Issues with Large Deposits
You can sidestep headaches related to large deposits with proper planning:
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Discuss expected deposits with your loan officer upfront.
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Maintain meticulous records tying any deposits to a source.
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Keep existing bank account balances stable once your mortgage application is submitted.
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Wait to deposit cash gifts, proceeds from sales, etc. until after loan approval.
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If timing permits, make large deposits well in advance so they are “seasoned” by application time.
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Only deposit what you can thoroughly document if questioned later.
Being transparent and proactive with your lender ensures any deposits can be smoothly explained if necessary.
Frequently Asked Questions
What exactly is defined as a “large deposit”?
A large deposit typically means any single deposit over 50% of your monthly gross income. Actual thresholds vary based on your specific financial profile and loan program.
Why do lenders scrutinize large deposits so closely?
Lenders want to make sure you make enough money to pay your mortgage. Large deposits that you can’t explain could mean that you are borrowing money or stretching your budget too thin.
What paperwork do I need to show where a large deposit came from?
Typical documents include bank statements, gift letters, receipts, canceled checks, or other records tying the deposit funds directly to you.
What if I can’t adequately document the source of a large deposit?
Failure to document large deposits may lead to loan denial, higher rates, lower approved loan amounts, or delays until funds are “seasoned” in your accounts.
How can I avoid issues related to large deposits when applying for a mortgage?
Discuss expected deposits upfront, maintain detailed records, wait to deposit questionable funds until after approval, and season funds in advance when possible.
The Bottom Line
While plunking down a hefty chunk of cash may seem like a positive when buying a home, large deposits can quickly derail your mortgage application if not handled properly. Clear communication and meticulous documentation are key to avoiding problems. When in any doubt, consult your loan officer so they are looped in and can guide you accordingly. With the right preparation, you can leverage large deposits to improve your mortgage terms while still sailing smoothly through the approval process.
What Is Structuring?
Structuring is when you divide a large deposit into smaller amounts to avoid CTR reporting requirements. It seems innocent enough if your money is from legitimate sources, but it’s still illegal. You could face up to five years in prison and a fine of up to $250,000. These penalties are doubled if you structure more than $100,000 over 12 months or combine structuring with breaking another federal law.
“Even without legal action, banks can still freeze or close accounts if a customer is structuring deposits. This is another reason it’s important to keep good records and have all relevant documentation to show the source of the cash deposits,” advised King.
What Happens When Large Deposits Are Reported?
Financial institutions use Currency Transaction Reports to inform the federal government about deposits greater than $10,000. These reports go to the Financial Crimes Enforcement Network (FinCEN).
In most cases, a CTR must be filed for each currency transaction that exceeds $10,000. This includes bank deposits, withdrawals, currency exchanges, payments, and transfers.
Federal law requires financial institutions to gather personal information about the depositor. This might be a Social Security number, driver’s license, or government-issued ID. This information must be obtained whether or not the depositor has an account at the receiving financial institution.