Answers · The process
Why does the lender need a letter explaining a deposit?
Because the lender has to prove your down payment and reserves are your money, not a new loan you took out quietly and not funds that must be returned. Any deposit that does not match your normal pay pattern needs a source. The letter plus a document that backs it up is how that gets settled.
Written by Andrew Malm, Senior Loan Originator, NMLS# 2663426. Last reviewed .
This is one of the most misunderstood steps in the whole process. A letter of explanation is not an accusation. It is a form of documentation, the same as a pay stub, that lets the underwriter close an open question in the file.
What counts as a large deposit depends on the program and your income, but the test is simple: would a stranger looking at your statements be able to tell where the money came from? A paycheck is obvious. A tax refund is obvious once they see the refund notice. A transfer from a savings account is obvious once they see that account too. A cash deposit is the hardest, because cash has no paper trail at all.
Gifts are fine on most programs. They need a gift letter from the giver stating that no repayment is expected, and usually proof that the giver had the money. Loans from family are different and have to be disclosed as debts.
The letter itself should be short, factual and signed. What the deposit was, where it came from, and the document attached that proves it.
What I'd do
- Keep a copy of anything that explains a deposit: the sale receipt, the refund notice, the gift letter.
- Avoid cash deposits in the two months before you apply. If you have cash, talk to your lender about how to handle it before it goes in the bank.
- Write the letter the day it is asked for. These are the easiest delays to prevent.
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