Mortgage Deposits: What You Need To Know

When it comes to mortgages, there are several types of deposits to be aware of, including earnest money, down payments, and escrow deposits. Earnest money is a deposit made early on to show good faith and commitment to the purchase. While it can be returned to the buyer under certain circumstances, a down payment is not refundable. The down payment is a larger payment made at closing that reduces the amount of the mortgage loan. An escrow deposit is held by a third party and ensures the transaction is running smoothly. It is important to note that lenders will require proof of the source of your deposit, and cash deposits are generally not accepted.

Characteristics of How Deposit for Mortgage

Earnest money deposits show good faith and commitment to the purchase

An earnest money deposit is a sum of money provided by the buyer to prove their seriousness and commitment to purchasing a home. It is a good-faith deposit that shows the buyer's unwavering commitment to completing the transaction. The deposit is made early in the process and is typically held in a third-party escrow account until closing, at which point it is applied to the buyer's down payment and closing costs.

The amount of earnest money required can vary depending on the market interest and the competitiveness of the real estate market. In a highly competitive market with multiple buyers vying for the same property, sellers may demand larger deposits to ensure buyers are serious. The deposit amount may also depend on the buyer's financial stability and credibility. It is generally recommended to provide a higher good faith deposit in a competitive market to increase the chances of securing the purchase.

Earnest money deposits can range from 1% to 10% of the sales price, with the exact amount depending on the specific market and property. It is important to understand the contingencies in place that protect both the buyer and seller in certain situations. For example, if the deal falls through due to a failed home inspection or other specified contingencies, the buyer should get their earnest money back. However, if the buyer breaks the terms of the contract, they may risk losing their earnest money deposit.

To protect the seller, the purchase agreement typically includes a timeline for when each aspect of the process should be completed. If the buyer misses these deadlines, the seller may have grounds to back out of the deal and keep the earnest money deposit. It is crucial for buyers to be comfortable with the contingencies and confident that their actions will not result in losing their good faith deposit.

Lenders require proof of identity, address, and deposit source

You will need to provide proof of the disclosed source of your mortgage deposit money, and lenders will carry out rigorous checks to confirm you have been truthful about the origins. Lenders will also examine other things, like the property's loan-to-value (LTV) and your credit history.

There are various documents you can provide as proof of funds for buying a house and where your mortgage deposit came from. Common evidence includes signed contractual agreements, bank/savings account statements, and certain forms of certification. The type of proof you must provide will depend on what you disclose as the source of the funds. For example, if you are using personal savings, most lenders will ask for six or more months of bank account statements, which demonstrate the funds gradually building up over time. Lenders are also usually happy to accept deposits funded by the proceeds from the sale of a previous property, inheritance, or equity from another property.

If you are depositing a large sum of money into your account, it is best to do so after your mortgage loan has been approved, or to season the funds before applying for your loan. A large deposit is generally considered to be any amount that is more than 25% of your usual monthly income.

Avoid cash deposits as they are difficult to source

When applying for a mortgage, it is important to avoid cash deposits as they are difficult to source. Lenders need to verify that your income and assets are legitimate, and cash deposits can stall the mortgage process as they are harder to track.

Lenders will ask for proof of the source of your mortgage deposit, and cash is difficult to reliably source. If cash is deposited into your account, it could make all the funds in that account untrustworthy. Lenders will be suspicious of any large deposits that are out of the ordinary for your account. They may ask for additional bank statements or pay stubs to verify the source of the funds.

A large deposit is generally considered to be any out-of-the-norm amount of money deposited into your checking, savings, or other asset accounts. This includes cash on hand in your home that was never deposited, also known as "mattress money". Proving the source of this type of money is difficult, and it is best to wait until after your mortgage loan is approved to deposit these funds.

To avoid issues with your mortgage application, it is recommended to season the funds before applying for your loan. This means that the money has been in your checking or savings account for at least 60 days. Lenders typically require the past two months of bank statements during the loan application process, so this is enough time for any new deposits to be considered part of your savings.

In summary, it is important to avoid cash deposits when applying for a mortgage as they are difficult to source and can lead to delays or even denial of your loan application. By planning ahead and seasoning your funds, you can ensure that your mortgage application process goes smoothly.

Provide proof of funds with bank statements, contracts, and certifications

When buying a house, you will need to provide certain documentation to obtain a mortgage. You may also need to provide a letter to the seller to prove that you can cover the purchase costs of a home. This may include the down payment, escrow, and closing costs. This document is called a proof of funds (POF) letter.

A POF letter is a document that demonstrates how much money a person or entity has available. There are several types of documents that qualify as proof of funds. In some transactions, a simple printed bank statement will suffice. At other times, you will need a letter from your bank or financial institution that states the exact amount of accessible or liquid funds that you have available. This letter must include your bank’s name and address, the balance of total funds in your accounts, the balance of funds in your checking or savings account, the signature of an authorized bank employee or notary, and verification of the date the funds were in your account.

You can obtain a POF letter by going to your bank or printing the document online. If you have money in different accounts, you need to move the necessary funds into one bank account. Once your funds are all in one account, you can ask your financial institution to provide the letter.

It is important to keep your POF letter secure once you receive it, as it may hold sensitive information such as your account number and physical address. Only give your POF to those who need it to execute the sale of your new home.

Escrow deposits are held by a third party until the transaction is complete

An escrow agreement is a crucial aspect of real estate transactions, protecting both the buyer and the seller during the home-buying process. An escrow deposit, also known as a good faith deposit, indicates the buyer's commitment and seriousness about purchasing the home. This amount is negotiated and included in the purchase agreement, showcasing the buyer's intent to honour the contract.

The escrow deposit is held by a third party, such as an escrow company, agent, or mortgage servicer, until the transaction is complete. This neutral party ensures that the deposit is secure and will be returned according to the terms of the agreement. If the contract falls through due to the buyer's fault, the seller usually retains the deposit. However, if the sale does not go through due to issues covered in the outlined contingencies, the buyer may get their earnest money back.

During the transaction, the escrow officer or company representative maintains possession of all crucial documents and deposits, facilitating a smooth process while the buyer and seller finalise the details. The escrow company, working for both parties, typically charges a fee for its services, which is split evenly between the buyer and the seller.

In some cases, an escrow holdback may be necessary even after the completion of the home sale. This could be due to specific agreements between the buyer and seller, such as allowing the seller to stay in the home temporarily or addressing outstanding bills for which the seller is responsible. Once all conditions are met, the funds in the escrow account are released to the appropriate party.

Additionally, throughout the term of the mortgage, an escrow account may be used to hold funds for taxes, insurance premiums, and other costs associated with homeownership. This ensures timely payments to third parties, such as taxing authorities and insurance companies. Lenders may also require an "escrow cushion" to cover any unexpected costs that may arise.

Frequently asked questions