I recently had the opportunity to review some Fannie Mae MORA Audit Reports, as well as some HUD on-site lender reviews, and a common underwriting deficiency cited in these reports is “failure to adequately verify the source of large deposits made by the Borrower(s)”.
As a result, it is essential for underwriters to be knowledgeable of the different criteria established by the GSE’s and FHA & VA on this topic. Outlined below is a summary of these requirements:
- HUD/FHA – For any recently opened accounts and recent deposits of more than 2% of the Sales Price on a Purchase transaction, the lender must adequately document the source of these deposits and verify that no debts were incurred to obtain part, or all, of the borrower’s Minimum Required Investment, (refer to the 4155.1 HB). This 2% threshold is also applicable to Earnest Money Deposits (EMDs). It is important to note, however, that HUD is proposing to lower their threshold to 1% of the Adjusted Value (lower of Sales Price or Appraised Value) for validating the source of recently opened accounts and recent deposits and EMDs when their draft 4000.1 Handbook becomes effective for Case Number Assignments issued on & after September 14, 2015.
- Fannie Mae – According to Fannie Mae’s Selling Guide (B3-4.2-02), when Bank Statements (typically covering the most recent two months) are obtained on a Purchase transaction, the lender must evaluate any large deposits, which are defined as a single deposit that exceeds 50% of the total monthly qualifying income of the Borrower. These deposits must be determined to be from an acceptable source. The lender MUST place written documentation of the rationale for using these funds in the file.
- Freddie Mac – In their Guide Bulletin 2014-12, Freddie Mac revised their requirements for verification of large deposits when using account statements to verify assets. Prior to this Bulletin, any single deposit exceeding 25% of the total monthly qualifying income for the Borrower(s) had to be documented. This Bulletin increased the threshold to 50% which is consistent with Fannie Mae’s requirement.
- VA – In VA Pamphlet 26-7, Revised – Chapter 4, it is simply stated to verify all liquid assets owned by the applicant or spouse to the extent that they are needed to close the loan. In addition, verify any liquid assets that may have a bearing on the overall credit analysis; that is, significant assets. Underwriters reviewing VA loan transactions must verify the veteran’s source of funds for payment of any difference between sales price and loan amount plus closing costs, if the sales price exceeds reasonable value established by the Notice of Value (NOV) on Refer rated cases.
However, no verification of the veteran’s source of funds is required if closing costs plus the difference between the sales price of the property and the base loan amount is less than 4% of the lesser of the sales price or NOV on Accept/Approve rated cases.
Finally, underwriters should always take note of the documentation requirements outlined on the DU or LP Feedback Certifications contained in the loan file and be mindful of the differences in the GSE and Agencies’ policies on large deposits and assets in general.
Prudent underwriting could save your firm thousands of dollars by reducing the number of Repurchase & Indemnification Agreement Requests that are received based on the post-closing reviews being processed by the GSEs, HUD & VA.