Cash isn't king in the mortgage world. Ample income, good credit, and low debt won't get you very far if you can't provide a proper paper trail.
“Paying cash” for a house typically means that someone is buying the home outright (without a mortgage). But sometimes, mortgage borrowers want to use cash as a means to qualify for their mortgage. During the mortgage process, there are several times you may want to use cash: for an earnest money payment, for an option fee, and for the down payment and closing costs.
» READ MORE: Brush up on our must-know mortgage vocabulary list
Receiving cash as your main means of income doesn’t disqualify you for a mortgage. But it can make things tricky. Here’s what you need to know about using cash throughout the mortgage process.
Here’s why cash gets tricky
Lenders have to see a clear paper trail. They have to see exactly where your money came from. For one, they’re legally obligated to this because it fights money laundering and illegal sources of income. Al Pacino may have a difficult time qualifying for a mortgage (for obvious reasons).
But even if you don’t report the sale of a car, it could present issues when qualifying for a mortgage. If a deposit is more than 50% of your monthly income, it may be questioned. Lenders take all kinds of tax evasion very seriously.
And secondly, an established bank account tells lenders a more complete story about the consistency of your finances. Before they give you a large sum of money, they have to calculate the risk of you not being able to pay your mortgage.
What if you operate a cash-driven business?
If you’re a cash-driven business owner or 1099 worker, you can still qualify for a mortgage. The most important thing is that your tax returns are accurate.
Restaurant owners, lawn care company owners, babysitters, nail salon owners, and other cash-driven business owners need to take special care to report earnings accurately if they’re hoping to use a mortgage in the future. Even if you’re simply depositing a few hundred dollars of cash into a savings account each month to build up to a down payment, you need to report those savings to the IRS. Otherwise, your lender doesn’t know where that money came from.
Self-employed workers can run into problems with cash. It’s better to have patrons pay with a card. If they pay cash, place it into your bank account. We know that paying taxes isn’t necessarily a fun thing to do - but mattress money won’t ever help you qualify for a mortgage.
Receiving cash as your income isn’t a problem. Just put it into a bank account and report earnings to the IRS to get squared away with your mortgage lender.
“Season” your funds
We’re not talking about paprika; we’re talking about how long you’ve had funds sitting in a bank account. As you're saving for mortgage expenses, put money into a bank account and let it sit there for at least sixty days. Don’t move your money around to different accounts. Don’t make large withdrawals, and don’t make large cash deposits during the mortgage process. Underwriters tend to look sideways at these things.
Some borrowers with banks out of town may have trouble getting cashier checks or wiring funds to their lender. In these cases, sometimes it’s easier to open a new account at a local bank. Your lender will still be able to trace your funds from their source. Just be sure to start this process early in order to avoid delays in certifying your funds for closing.
If you transfer funds from an already-existing bank account into a brand new account, the funds can still be considered seasoned.
What if you just got a new job?
If you’re a college graduate that just started your first job, or you just moved companies to a different job, a full sixty days of bank statements may not be required. If you have seasoned funds in a savings account from before you started your new job, your credit score is where it needs to be, and your debt is at an acceptable level, you’re on the right track for qualifying for a mortgage.
Can someone else pay on my behalf?
Yes - and no. Always ask your loan officer before asking someone else to write a check for you.
- The “Yes” scenario: Your dad wants to help you make a down payment. Your lender provides the proper documentation for receiving gift funds, and your dad’s funds are traceable. Your dad writes a letter to the lender explaining who he is and what his gift is for.
Unless you're purchasing an investment property, most loan programs allow the use of gift funds. Your mortgage adviser will help you through this process.
- The “No” scenario: Your real estate agent offers to write a check to the mortgage company for you, and you pay the agent in cash. This should never happen, as others involved in your home transaction cannot be involved in providing funds.
Here’s the basic rundown of the do’s and don’ts when it comes to paying mortgage dues with cash:
- Don’t move money from account to account.
- Make sure funds are seasoned (60 days in a bank account).
- Don’t use cash advances from credit cards or other loans.
- Don’t give someone else cash and have them write a check.
- If you’re paying by money order, you must show that you withdrew that money from your own bank account.
- Money held in safe deposit boxes isn’t any different than using cash from any other source.
- Gift funds from family members may be allowed, but you still need to show a proper paper trail.
We help all kinds of homebuyers through the mortgage process. If you’re self-employed (or, if you aren't!), we’d be happy to answer your questions. Get started on a free pre-approval now.