I wrote a blog a couple of days ago titled Compensating Factors Required To Qualify For A Mortgage. Ginny Gorman commented in the blog about one of the Compensating Factors, "Mattress Money", which made me realize that I needed to explain why "Mattress Money" is a problem in meeting Underwriting Guidelines, but can be used when it comes to Compensating Factors.
First of all let me define what the term "Mattress Money" is. "Mattress Money" can actually be money that is stuffed in a mattress, but more often than not it is money that is being held by the Borrower in cash, and can not be documented where it came from. Therefore, "Mattress Money" cannot be used towards downpayment or closing costs, since Underwriting Guidelines clearly state that all funds have to be documented.
There are a variety of reasons why someone would have large sums of money in their house or a safety deposit box. For example I did a loan for a friend of mine that had taken all of his money out of the bank when Clinton became President He was convinced that Clinton was going to bankrupt this county, and he did not want to have his assets frozen when it happened. Other's might not be as eccentric as my friend, but may have large sums of cash for reasons that are not completely legal, and that is the main one of the main reasons why "Mattress Money" cannot be used.
In order to be able to use "Mattress Money" in qualifying for a Mortgage the money needs to be deposited in a bank account for anywhere between 30 to 90 days depending on the type of Mortgage Program that the Borrower is applying for, in order to properly document it. If the "Mattress Money" is not made know until the Borrower is under contract, then there is not enough time for it to be deposited for the necessary time (Seasoned), so it cannot be used.
So why is that not an issue in using "Mattress Money" as a Compensating Factor? The reason is that in the case of a Compensating Factor the money is not actually being used to qualify for the Mortgage, it is basically a security blanket. However, some form of documentation to prove that the money really exists needs to be provided, and a picture of a large pile of money stuffed in a mattress is not good enough, the money needs to be deposited. By depositing the "Mattress Money" it can then be proven that it actually exists, and even though it has not been Seasoned, it can be used to show that the Borrower has a large amount of funds in reserves, which then gives strength to the loan.
I don't want anyone to think that it can be taken for granted that just because a Borrower has a lot of "Mattress Money" that the Underwriter will be willing to use it as a Compensating Factor. There is no guideline that requires an Underwriter to do that, the guidelines just simply provide the Underwriter with the latitude to do so
This is why at my earliest contact with a Borrower I start to discuss with the funds that will be required for downpayment and closing costs, and where is it coming from. Those the Borrowere already have it in the bank? If not when, where, and how are they getting it? And begin to identify if we are going to have a problem or not. Because if we know that we need to have money Seasoned, then we need to start doing that right away. Better to Season the money, then to try to use it as a Compensating Factor. Compensating Factors should be used as a last resort, and should not be depended on.
This all means that a Loan Officer has to anticipate problems before they happen. That means taking the time at first contact with the Borrower to ask all the necessary questions and take a full Application. Most problems can be identified if the Loan Officer does his/her job right from the very beginning. In this business you can not take short cuts, because if you do, problems are going to occur, and transactions are going to blow up.
Info about the author:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or email@example.com