When you’re in the process of buying a home, your lender will carefully review your financial documents, including your bank statements. One question borrowers often ask is, Why do large deposits in my bank account need to be sourced? Here’s what you need to know about this important part of the mortgage process.

What Does “Sourcing” a Deposit Mean?

Sourcing a deposit means providing documentation that verifies where the money came from. This could include pay stubs, sale receipts, gift letters, or any other evidence that clearly traces the funds to a legitimate and acceptable source.

Why Lenders Care About Large Deposits

Lenders require this information for two key reasons:

1. Ensuring Funds Are Not Borrowed
   Borrowed funds could increase your debt-to-income (DTI) ratio, which is a critical factor in determining your eligibility for a loan. To ensure the large deposit won’t negatively impact your qualifications, lenders must confirm the money isn’t from a loan or other borrowed source.

2. Confirming Funds Are From an Acceptable Source
   Not all funds can be used toward a home purchase. For instance, cash deposits are difficult to source and often not considered usable because they lack a verifiable paper trail. Lenders need to confirm the deposit comes from a source such as a paycheck, sale of an asset, or a gift from an approved donor.

What Qualifies as a “Large Deposit”?

A large deposit is typically defined as any amount that exceeds 50% of your monthly income or appears unusual compared to your regular banking activity. Each lender may have slightly different thresholds, so it’s essential to consult your loan officer for clarification.

Examples of Usable and Unusable Sources for Large Deposits

• Usable Sources:

  • Payroll income

  • Tax refunds

  • Sale of a car or other personal asset (with a bill of sale)

  • Gift from a family member (with a signed gift letter)

• Unusable Sources:

  • Cash deposits without documentation

  • Funds from undisclosed loans

How to Document a Large Deposit

To avoid delays in your mortgage process, here are some common ways to document large deposits:

• Pay Stub or Direct Deposit Confirmation: For income-related deposits.

• Bill of Sale: For assets you’ve sold.

• Gift Letter: If the funds were a gift, the donor must provide a letter stating the money is not a loan.

• Bank Statements: Showing the transfer of funds between accounts.

Why Cash Deposits Are Problematic

Cash deposits are among the most challenging to use because they often lack a clear paper trail. Without sufficient documentation, lenders cannot verify the source, making these funds typically unusable in the loan approval process.

Final Thoughts

Large deposits aren’t necessarily a red flag, but lenders need to ensure your financial situation is transparent and stable. By providing proper documentation upfront, you can avoid unnecessary delays and keep your homebuying journey on track.

For more insights on preparing for your mortgage, check out resources from the Consumer Financial Protection Bureau: https://www.consumerfinance.gov/owning-a-home/