Documentation has always been important in the Lending Industry, but most likely it has never before been as important as it is today. Today it is document, document, and then document some more. One of the areas documentation has substantially increased is in documenting assets. If an asset can't be documented, then it can't be used in qualifying for a mortgage, except in the possible case of being used as a Compensating Factor. A monetary asset which cannot be documented is referred to in the Lending Industry as Mattress Money. Before I go on to explain the problem with using Mattress Money, let me define What Is Mattress Money it a little better.
Mattress Money can actually be money that is stuffed in a mattress, but more often than not it is money being held by the Borrower in cash some place other than a bank account, and cannot be documented where it came from. Therefore, Mattress Money as I stated above, cannot be used towards down payment or closing costs, since Underwriting Guidelines clearly state all funds have to be documented.
There are several reasons why someone may have large sums of money in their house or in a safety deposit box. They can range from trying to avoid paying taxes on the money, to an off the wall reason like a friend of mine had. I did a loan for a friend who had taken all of his money out of the bank when Clinton became President. He was convinced Clinton was going to bankrupt this county, and he did not want to have his assets frozen when it happened.
While my friend's reason for not having his money in the bank is a bit eccentric, it was not illegal. However, trying to avoid taxes, or money laundering is illegal, and that is where the origin of the need for documenting assets came from, and 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 30 to 90 days depending on the Mortgage Program the Borrower is applying for. This is referred to in the Lending Industry as Seasoning the funds. So if Mattress Money is identified early in the Mortgage Pre-Approval process, it can be deposited in a bank account, and available when the Borrower finds a property and goes under contract. But if the Mattress Money is not know until the Borrower is under contract, then there is not enough time for it to be deposited for the necessary time (Seasoned) and the Borrower will not be able to use it.
So why can Mattress Money be used as a Compensating Factor? 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 the money really exists needs to be provided. By depositing the Mattress Money it can then be proven it exists. Even though the Mattress Money has not been Seasoned, it can be used to show the Borrower has a large amount of funds in reserves, which then gives strength to the loan.
Another area money may come from a legal source, but may not be used is Gift Money, . Money maybe gifted, but in order to be used for a mortgage it has to come from an authorized gift source. I am not going to go into detail on Gift Funds in this blog, but you can follow this link on Gift Funds to one of my blogs which will explain Gift Funds in more detail.
This is why at my earliest contact with a Borrower I start to discuss the funds they will need for down payment and closing costs, and where funds will come from. Does the Borrower already have it in the bank? If not when, where, and how are they getting the funds? By asking these questions I am able to identify the source of the funds and if we are going to have a problem with documenting them. If I know early in the process we need to have money Seasoned, then the Borrower can start Seasoning the funds right away.
This all comes down to a Loan Officer anticipating problems before problem exists. 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, if you do problems are going to occur, and transactions are going to blow up.
What Is Mattress Money? It is a little more than money stuffed in a mattress.
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Info about the author:
George Souto NMLS# 65149 is a Loan Originator 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, #Moodus, #Chester, #Deep River, and #Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com
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