Best Practices to Verify Your Clients’ Down Payments
Proving the source of your clients’ down payments can sometimes be the most time-consuming part of arranging a mortgage. Even when handled well, the process may sour the buyer experience.
Your client will need to provide a comprehensive history of all the money earmarked for their down payment and closing costs, including detailed explanations of some of the transactions in every source account.
You have to make the best of it. Let’s explore ways we can make the process smoother for your lender, your clients and yourself.
Help Your Clients Get Organized in Advance
The moment your client is thinking about buying a home, suggest they start amassing all their different sources of money into one single bank account. Don’t wait. Holding the down payment in a single “staging account” may cut down the requested paperwork and simplify the verification process.
Some clients may be concerned about moving money from their savings account and losing potential interest. Have you seen how little people are actually making in their high-interest savings accounts? Don’t worry about lost interest benefits.
Ideally, when it comes time to verify their down payment, most of the money will have been in this staging account for a minimum of three months.
But some things you cannot rush – like tapping into RRSPs under the government’s Home Buyers Plan. For this money, you need to wait till there is an accepted Agreement of Purchase and Sale.
Typical Down Payment Sources
The most common sources of money for a down payment are personal savings, held in various accounts such as savings and chequing accounts, mutual funds, GICs, RRSPs, TFSAs and stock trading accounts.
Gifted funds vs. family loans: Many borrowers, especially first-time buyers, rely on help from an immediate family member in the form of gifted money. If the funds are genuinely gifted, that is fine. However, “family loans” are treated like bank loans, and can affect the mortgage approval.
Self-employed: Some applicants rely on money from their business bank accounts.
Other borrowers have overseas bank accounts. Or they have family overseas who wish to help out with gifts.
You won’t get very far with the mortgage application if the borrower intends to use cryptocurrencies for the down payment. Cryptocurrencies have come a long way in the past few years, but they are not yet mainstream, at least not as far as mortgages are concerned.
Although clients sometimes feel this verification process is an invasion of their privacy, it is the lender’s right to ask for whatever information they feel is reasonable. Most lenders will want to see a 90-day history, but we have seen cases where they go back one or two years to satisfy themselves that the source of funds is legitimate.
Last week, we submitted an application for a purchase where the buyer is coming up with a $500,000 down payment, yet his salary is $95,000, and he is still in his thirties. Even though the down payment had been in his account for several months, the lender wanted to know how he came to have so much money, as it didn’t fit his overall profile. It turned out he had sold a home last year, and all was well.
Why Do Lenders Care About the Source of the Down Payment?
Mortgage lenders need to be sure the down payment is from legitimate sources. Here are four things they are watching for:
1. Anti Money Laundering (AML)
Anti Money Laundering (AML) rules are the lender’s primary concern. Large deposits always need an explanation, whether they are being used for the down payment or not.
There is no agreed standard minimum transaction requiring a second look. It will depend on the lender and the borrower’s profile.
Every lender will care about deposits over $10,000. Others will want an explanation and corroborating documentation for less – sometimes $3,000 or more. We have seen instances where anything over $1,000 needed an explanation.
2. Sanctioned Countries
Lenders also care about whether or not money emanates from a sanctioned country. For example, Canada has implemented mechanisms to prevent the concealment and transfer of funds or assets used to finance terrorism. This applies to the down payment, as well as to the borrower’s earnings.
Unexplained cash deposits and mysterious, large e-transfers cause concern because it’s not the norm, and lenders will want a satisfactory explanation. The lender will want to know where the money is coming from. For instance, is it gambling winnings? From a side business? The lender wants to make sure the cash is coming from a legitimate source and not ‘under the table.’
4. Borrowed Money If any part of the down payment or closing costs is borrowed, the lender needs to know this. They will impute a monthly payment for this money, typically 3% of the amount borrowed. This often catches borrowers unawares. Regardless of how little is actually being repaid each month, the imputed payment will change the borrower’s debt service ratios and perhaps put the mortgage approval at risk.
Organizing Your Documents
Mortgage brokers swap horror stories of complex down payment packages numbering 100 pages or more in length across numerous accounts.
You should always presume no one knows anything about your client, so you must present the information in a logical, well-laid-out manner that would make sense to a complete stranger.
Lender staffers have hundreds of active files, and you cannot expect them to remember every detail about your file. The information has to be packaged together in such a way that an extremely busy document specialist at the lender can determine relatively quickly what is what.
Understand that every time the lender opens your package or email, if something requires an explanation, or key information is missing, the document specialist has to send back notes citing the deficiencies and move on to the next file.
Each time you go back and forth with the lender, it may take several days to see a response. When you start a file, you may find yourself thinking, “we have all kinds of time to get this done.” But after weeks of back and forth with your lender, your tune may change to, “Will they ever finish? We are supposed to close this purchase in a few days!”
Tips ForPresenting the Information
All of the information you present to a lender must be full, plain and clear. Lenders have zero tolerance for redacted documents.
All pages in your document package should be numbered. You will frequently be cross-referencing, and doing so to a specific page number will save everyone lots of time.
The first page of your package should be a summary document, which clearly states the total amount of funds you need to verify (down payment plus 1.5% closing cost, if requested), and that lists the various financial accounts you are sourcing. Each account should be described by the name of the bank, account type and dollar amount.
Avoid presenting phone screenshots or jpegs. It is much better to provide PDFs made from a computer.
Use a PDF editor generously to make colour-coded notes to the lender explaining transactions, citing the accounts by name and the page number in your package.
How to Present Information Based on the Down Payment Source
If some of the down payment is gifted, you will need to show the gift going into the borrower’s account, and you will need the applicant and their donor to complete a gift letter unique to the lender you are working with. There is not a generic gift doc that can be used across all lenders. Some lenders may ask to see the donor’s bank account statements too.
If some of the down payment is from overseas, get the money into the borrower’s accounts and source proof of the money coming from its origin accounts overseas. You may need wire transfer proof too.
If some of the down payment is from the client’s business bank account, you will need to provide their business bank statements as well as the personal account the money was transferred into. Invoices for large amounts may be necessary too.
Clients With Several Accounts
The fewer accounts your clients have, the better. Many clients have 10 or more different accounts and with money being transferred in and out of these accounts, it all has to be cross-referenced and explained.
Each account involved in the transaction will need to produce three months of full statements, showing name, account number, transactions, and balance history. Using online banking, you can often print three months worth of activity in one take, printing to PDF all the activity for a specific period. That’s nicer than having three separate documents. Again, the fewer documents, the better.
Suppose the printout you produce does not identify the borrower by name. In that case, you need to corroborate the name in some other way – whether by attaching an old statement or by printing the profile page from the borrower’s online banking, which shows the name AND account number belonging to your borrower.
Believe it or not, we could write much more on this topic. Lender guidelines are quite lengthy and detailed on the topic of verifying the down payment. Make sure to take this process seriously, and always allow lots of time to gather and organize the information. In this article, we discussed general good practices. But please understand every lender has unique standards, and you must follow those or you may fail.
Document specialists dread receiving complex packages, especially in busy times, and will naturally favour those that are well-presented and coherent. The confusing, messy packages will have a hard time getting to the top of the pile.
If you want to see fast results and a reasonable turnaround time, it is your responsibility as a mortgage agent to diligently gather and present your client’s information precisely and comprehensively.