Cash and your mortgage: how to use cash savings

Many people save in cash. This guide is for you if you keep money at home, get paid in cash or made a large deposit that the lender asked you to explain. You will see why the lender asks where your money came from, what FHA and Fannie Mae allow, and how to move your cash into the bank calmly and with a paper trail.

Of bank statements, what the lender usually reviews on a purchase

2 months³

Of your monthly income; a larger deposit must be documented

50%⁴

Before closing, at the latest, cash must be in the bank on HomeReady

30 days⁶

In cash in one day; go over that and the bank files a routine report

$10,000¹¹

Why the lender asks where your money came from

It is not personal: the rules require the lender to verify every dollar you use to buy. The CFPB explains that cash to close is usually paid by cashier’s check or wire transfer, and that you will need to prove where it came from.¹ On an FHA loan, the lender must document all the money you use to qualify or close, and confirm it comes from an acceptable source.¹⁰

For Fannie Mae, money in your accounts can go toward the down paymentdown paymentThe down payment is the part of the home's price you pay out of your own pocket when you buy; the loan covers the rest. In U.S. Spanish it is also called enganche, cuota inicial or entrada. Each loan type has its own minimum: FHA requires at least 3.5% of the value, VA and USDA loans may require none, and conventional loans ask for more if you want to avoid private mortgage insurance. A larger down payment lowers the loan, the monthly payment and the total interest; many state programs help families put it together.See the full definitionClose, closing costsclosing costsClosing costs are all of the costs you pay on closing day on top of the down payment: lender fees, the appraisal, the credit report, title insurance, the closing agent's fees, any transfer taxes your state or county charges and the first deposits into the escrow account. The lender must itemize them on the Loan Estimate within days of your application and confirm them on the Closing Disclosure before you sign. Some can be paid by the seller, and several state programs help cover them.See the full definitionClose and reservesreservesReserves are the cash and other easy-to-cash assets you still have available after the mortgage closes. They are measured in months: how many full monthly house payments (principal, interest, taxes, insurance and association dues) you could cover with them. Under Fannie Mae's rules, they include money in checking or savings accounts, investments, the vested part of a retirement account and the cash value of a life insurance policy; personal loans and the money you use to close do not count. An eligible gift can also be used. How many months are required depends on the loan and the property.See the full definitionClose if it can be verified. Money that cannot be verified is not accepted, and the lender must investigate any sign that it was borrowed.⁴ So the lender does not just look at how much you have: it looks at how it got there.

The usual way to verify is with your bank statementsbank statementA bank statement is the summary your bank or credit union gives you of the activity in your account over a period: deposits, withdrawals, payments and the ending balance. Most send one every month, on paper or online; the law only requires a monthly statement when there was at least one electronic transfer that month, and otherwise it may come quarterly. When you apply for a mortgage, the lender can use your statements to verify you have money for the down payment, closing and reserves. Under Fannie Mae's rules, they must show the bank's name, your name, part of the account number, the period, all transactions and the ending balance.See the full definitionClose. On a purchase, Fannie Mae asks for the most recent full two-month period, with every deposit and withdrawal and the ending balance.³ The CFPB suggests having your two most recent statements and documents showing where your down payment came from, with at least two months of history.²

What a large deposit is and how to explain it

For Fannie Mae, a large deposit is a single deposit that exceeds 50% of the monthly income you qualify with. If you need that money for a purchase, the lender must document that it comes from an acceptable source.⁴ FHA’s rule is similar: the lender must document each deposit of more than 50 percent of your monthly income, and verify you did not borrow to put together the down payment.¹⁰

What counts as proof? Fannie Mae gives examples: your written explanation, proof that you sold something of yours, like a car, or a wedding invitation if you received gifts. If a deposit cannot be documented, that money is subtracted from your funds, and the lender checks whether what is left is enough.⁴ Some deposits need no explanation because the statement already shows where they came from: your paycheck by direct deposit, Social Security, a tax refund or a transfer between your verified accounts.⁴

Example with real numbers

When a deposit counts as large

Using the typical US household income as an example. Your own threshold depends on the monthly income you qualify with.

Monthly income of a typical household

$6,728

Deposit Fannie Mae and FHA consider large

One of more than half that amount

If you cannot document it

It is subtracted from your available funds

This is an example with national numbers. Fannie Mae defines a large deposit using your monthly qualifying income,⁴ and FHA using your monthly effective income.¹⁰

Run it with your numbersDown payment savings plan

Your cash savings at home

Cash you keep outside a bank is called “cash on hand.” Each type of loan treats it differently:

Cash kept at home: what each loan accepts

Yes, with an explanation

FHA loan

• It must be deposited in a bank or held by the title company.¹⁰
• You explain how you saved it and how long it took.¹⁰
• The lender compares it with your income, expenses and banking history.¹⁰

No

Standard Fannie Mae

• Cash on hand is not accepted for the down payment or closing costs.⁵
• Money already in your account is checked with your statements.³

Yes, with conditions

Fannie Mae HomeReady

• For a one-unit home; it cannot be used for reserves.⁶
• In the bank at application or at least 30 days before closing.⁶
• You sign a statement that the money is yours and not borrowed.⁶

In all three cases, the cash has to reach an account before closing and come from a source you can explain.¹⁰

On an FHA loan, the lender must verify that the cash is deposited in a financial institution or held by the title or escrow company. It will ask you to explain how you saved it and how long it took. Then it decides whether that is reasonable given that time, your income, your spending habits, your documented expenses and your history with banks.¹⁰

Fannie Mae, by contrast, does not accept cash on hand for the down payment or closing costs, except on its HomeReady loan.⁵ On HomeReady, for a one-unit home, the lender must verify that you usually pay your expenses in cash and that what you saved fits how you pay. The money must be in an account at application or at least 30 days before closing. You sign a statement about where it came from and that it was not borrowed, and your history should show little use of credit and little banking relationship.⁶ To use HomeReady, the yearly income of all borrowers may not exceed 80% of the area median incomearea median income (AMI)The area median income (AMI) is the median family income of an area, which HUD computes every year for each metropolitan area and county. Housing programs use it as the yardstick: under the federal rule, a family is low-income when it earns no more than 80% of its area's median income and very low-income when it earns no more than 50%, adjusted for family size. State down payment assistance programs and Section 8 vouchers publish their limits as a percentage of AMI, so the same salary can qualify in one county and not in the next.See the full definitionClose where the home is.⁷

How to move your cash into the bank

Depositing cash is normal. Do it early and keep a paper trail, so the lender can see the money on your statements.

From cash at home to money that counts

1. 1. Open an account

   As soon as you can

   At an FDIC-insured bank, the money in your account has that protection; a safe deposit box does not.¹²

2. 2. Deposit it the normal way, without splitting it

   When you take it in

   Over $10,000 in a day, the bank files a routine report; splitting deposits to avoid it is a crime.¹¹

3. 3. Keep every receipt

   The same day

   They help you explain any large deposit.⁴

4. 4. Write down how you saved the money

   Before you apply

   For FHA, explain how you saved it and over how long.¹⁰

   Try it with your numbersDocument checklist

5. 5. Let it show up on your statements

   Usually two months

   The lender reviews the most recent full two-month period.³

6. 6. Pay at closing from your account

   Closing day

   Usually by cashier's check or wire, with proof of where it came from.¹

   Try it with your numbersClosing costs

Will you be reported? According to FinCEN, the law requires banks to report cash transactions over $10,000 by one person, or several that add up to more than that in a single day, on a Currency Transaction Report (CTR). There is no general prohibition against handling a lot of cash, and the report is filed regardless of the reason.¹¹

If you do not have an account, the guide on opening a bank account without a Social Security number explains which IDs are accepted, and the guide on low-fee accounts explains Bank On accounts. A credit unioncredit unionA credit union is a not-for-profit financial institution that, like a bank, accepts deposits, makes loans and offers other services, but is owned by its members. Members elect a volunteer board of directors, and profits go back to them as lower fees, higher savings rates and lower loan rates. To join you need a common bond, such as your employer, your family, where you live or a group you belong to. It is chartered by the NCUA, a federal agency, or by a state. If the credit union is federally insured, your deposits are protected by the NCUA's insurance fund.See the full definitionClose is another option.

Earnest money and gift money

The earnest money depositearnest moneyEarnest money is a deposit the buyer pays when signing the purchase contract to show good faith that the offer is serious. The seller does not keep it: a neutral third party (the title company or a closing agent) normally holds it, and at closing it is applied to your down payment or closing costs. If you back out for a reason the contract allows, such as an inspection or financing contingency, you get it back; if you back out without a valid reason, you can lose it.See the full definitionClose you give when you sign the contract is checked too. On an FHA loan, the lender must verify its amount and source if it exceeds 1 percent of the price or is a lot for your history of saving. It checks with your canceled check, a statement from whoever holds the deposit or a bank statement.¹⁰ For Fannie Mae, earnest money above what is customary for the area is closely evaluated, and receipt is proven with your canceled check or a statement from whoever holds it.⁸ Paying it from your account, not in cash, leaves that trail.

If a relative wants to help you with cash kept at their home, on an FHA loan that cash cannot be the source of a gift.¹⁰ The guide on gift money from family explains the gift lettergift letterA gift letter is a document signed by the person who gives you money to buy a home, stating that the money is a gift and not a loan. For some loans, a gift can pay the down payment, closing costs or reserves, as long as you can prove where the money came from. Under Fannie Mae's rules, the letter states the amount of the gift, says no repayment is expected, and gives the donor's name, address, phone number and relationship to you. The lender also verifies that the money moved from the donor's account to yours or to the closing agent.See the full definitionClose and how the transfer is documented.

Tandas and other group savings

Many families save through tandas or cundinas. FHA calls them “private savings clubs”: a non-traditional way of saving by making deposits into a pool its members manage. The lender may accept money the club paid out to you if it verifies when the club started and how long it has run, that you received the money and that it was reasonably saved and not borrowed. It asks for the club’s ledgers and receipts and a statement from the treasurer that the club is still active.¹⁰

Fannie Mae accepts pooled savings for the down payment if you document your regular contributions with written confirmation from whoever runs the fund. If you still have to keep contributing, that commitment counts as debt in your debt-to-income ratiodebt-to-income ratio (DTI)Your debt-to-income ratio (DTI) is all your monthly debt payments divided by your gross monthly income, that is, income before taxes. If you pay a certain amount each month across a car, cards, student loans and the mortgage you are asking for, and you earn three times that, your DTI is one third. Lenders use it to measure whether you can manage the payment; each loan type and lender sets its own limit, and assistance programs usually publish theirs. Paying down debt before applying improves your DTI.See the full definitionClose.⁹

If you are paid in cash

Your income has to be verifiable too. The IRS says income must be reported on your return even if you are paid in cash and even if you get no 1099.¹³ On an FHA loan, the lender may only count income that is legally earned and, when required, reported on your tax returns.¹⁰

Regulation Z requires income to be verified with reasonably reliable third-party records. Its examples include your tax returns, bank records, check cashing receipts and money transfer receipts.¹⁴ If you cash your checks at a store or send remittances, keep those receipts. If you work for yourself, the guide on buying a home when self-employed explains how your income is figured.

If this is you

You are paid in cash

For FHA, the income on your tax returns when reporting is required is what counts.¹⁰ Keep check cashing and money transfer receipts.¹⁴

You have never had a bank account

On HomeReady, cash on hand is accepted for people who use little credit and few banking services, with conditions.⁶

You save in a tanda

FHA accepts money from a private savings club with its records and a statement from the treasurer.¹⁰

You do not have a Social Security number

The rule to document your funds is the same.⁴ See how to open an account without a Social Security number.

Mistakes that can stall your loan

• Mistake: Depositing all your cash a few days before closing.

  Instead: Deposit early so it shows up on your statements.³

• Mistake: Splitting deposits so the bank does not report them.

  Instead: Deposit normally; the report is routine and splitting is a crime.¹¹

• Mistake: Taking out a loan and depositing it as if it were savings.

  Instead: The lender investigates borrowed money; say so from the start.⁴

• Mistake: Not keeping receipts for your deposits.

  Instead: Keep every receipt and write down how you saved the money.¹⁰

• Mistake: Paying the earnest money in cash.

  Instead: Pay it from your account so you have a canceled check or a receipt.⁸

If you have questions about your numbers, a HUD-approved housing counselorHUD-approved housing counselorA HUD-approved housing counselor works at an agency HUD has approved to provide housing counseling: independent, expert advice customized to your situation about buying a home, renting, a missed mortgage payment, a foreclosure or credit problems. The agencies usually charge little or nothing; many serve in Spanish and offer the homebuyer education course several assistance programs require. They are not lenders or real estate agents and sell you nothing. Your county page lists the official agencies with phone numbers.See the full definitionClose gives independent advice, often free or at low cost.¹⁶ For your taxes, IRS VITA sites prepare basic returns for free for people who qualify; find one with the IRS locator or at 800-906-9887.¹⁵

What to do this week

1. If you keep cash at home, deposit it in an insured account and keep the receipt.¹²
2. Deposit it the normal way, without splitting it into small amounts to avoid the bank’s report.¹¹
3. Write a short explanation of how you saved the money and over how long.¹⁰
4. Gather documents for any large deposit in the last two months.⁴
5. Figure out how much you need with the down payment savings plan and check the document checklist.
6. Read the down payment guide and ask several lenders which loan works with the way you save.²