But, It’s My Money
There is no doubt that most of us work hard for every dollar we earn. Not everyone has inherited a million dollars. But no matter how we get our money, we must prove that it’s yours if you want to use it purchase a home with a mortgage loan.
There are a few major rules when it comes to mortgage loans when purchasing real estate for residential use. Today we will briefly touch on “AML” or Anti-Money Laundering” and “ATR” or Ability To Repay rule. These rules are primarily designed to protect you, the consumer, first and secondly the government’s investment into the secondary market (Fannie Mae and Freddie Mac). Let’s face it, we the people do not want to have to bail them out again.
The biggest and most common complaint that we receive from the consumer (buyer/borrower) is their having to prove where many of the deposits in their checking or savings accounts came from. This is extremely frustrating for the self-employed, hair stylist, waiters and waitresses, and other people who receive cash as part of their business model or make up.
“It’s my money” – but can you prove it?
Let’s use a couple of examples here to explain some of this. A waitress who receives cash tips every day and who works for a small restaurant. The restaurant doesn’t record all the tips into the waitress’ standard pay check to avoid paying payroll taxes has just done a big disservice to the waitress. That tip money will not be allowed to count toward her debt to income ratio under ATR.
If our waitress takes the tips and places them into a coffee can and hides the can in her freezer at home until she has saved up enough money for her down payment of her dream her, she will soon find herself very disappointed when we tell her she cannot use that money because we cannot prove where she received it from.
The best thing this waitress could do, short of making her employer include them as part of her income on her pay check, would be to deposit the tip money at the end of the day or the next business day in to her checking or savings account. These small cash deposits could prove to be consistent with her job and work schedule. These debts would have a better chance of qualifying for her down payment money. However, it would not likely count toward her ability to repay.
Our next example would be the small contractor working small jobs. It is not uncommon for these guys to be offered cash from homeowners or if they receive a check to run down to the home owners bank and cash the check and receive cash. Then they place the cash into their own account and often keep a few hundred dollars in their pocket. This can be devastating to the contractor as he just made this transaction nearly impossible to prove to the underwriter.
If a contractor receives cash from a job and he wants to be able to count this towards his down payment or closing cash, the contactor may be able to use these funds if he gets a signed letter from the person giving the cash along with that person’s driver’s license and a copy of the signed invoice for the work completed. The cash deposit would have to match perfectly with all that paperwork and it would still be at the discretion of the underwriter if it was to be accepted or not.
The rules are actually quite simple, we must have a way to track and trace the money. The government wants us to help prevent the possibility of loan fraud and money laundering. Loan fraud was the one of the biggest contributors to the financial crash. Remember only the big guys got bailed out – not you the consumer. Anti-money laundering rules helps prevent funding of terrorist attacks in our country and the curbing of drug trafficking.
Be responsible, be accountable, plan ahead and the loan process will be less frustrating. Ask questions to be informed and we will see you at a happy closing table.