I was recently contacted by a woman who wanted to get pre-qualified to purchase a home. She had saved about $70,000 in cash, which she currently had in a safe under her bed at home, and planned to use this money for the down payment. In the mortgage world, cash is always a problem.
All lenders are required to verify that a borrower has sufficient funds for closing, down payment and/or financial reserves. The most common way to do this is to provide bank statements. The statements must cover activity for the most recent two-month period. Any deposit greater than 50% of the borrower’s gross monthly income must be verified. This woman earned $5,000 per month in gross income from her job. So, the source of any deposit over $2,500 will need to be verified. If the source is cash, it cannot be used. The reason for this is rooted in preventing money laundering.
Anti-money laundering laws were first introduced with the Bank Secrecy Act of 1970. The designated administrator of the Bank Secrecy Act is the Financial Crimes Enforcement Network (FinCEN), whose sole mission is to “safeguard the financial system from the abuses of financial crime, including terrorist financing, money laundering and other illicit activity.” It wasn’t until after September 11th, 2001, with the passing of the USA PATRIOT Act, when the requirements were expanded to all financial institutions, including mortgage bankers and brokers.
So, how can this woman use these funds to purchase a new home? She needs to get them into a bank account. Once they have been in the bank for 60 days they are considered “seasoned” and able to be used. Something to keep in mind is that there are additional tax implications when depositing cash in excess of $10,000 in a single day. Banks are required by law to report these deposits to the IRS. Depositing just under $10,000 in multiple deposits to avoid paying taxes is called “smurfing” and is illegal. Here’s a good article about what can happen if you try to do this.
Please feel free to contact me at (312) 285-6644 with any questions you might have. And if you are a neighbor in Bowmanville, please say hello!
Heather McRae is a residential mortgage lender. She was first introduced to the real estate industry in 2001. Heather lends throughout the State of Illinois and specializes in condos within the City of Chicago. She is a proud resident of Lincoln Square’s Bowmanville neighborhood.