Will a mortgage lender check where my deposit has come from?
After many years of what some would call ‘crazy’ mortgage lending before the financial crash, mortgage markets now seem to have returned to more normal standards when it comes to lending criteria and mortgage deposits. By this I mean that they will now once again check that you can actually afford to repay any mortgage they approve. Some would argue that with the recent Mortgage Market Review things have even gone too far the other way in this regard, with lenders now having to do much more stringent checking of potential borrowers than they were required to even before the subprime lending boom and subsequent crash. We can see then that there will be many different financial checks undertaken for anybody who is looking to take out a mortgage.
This financial checking doesn’t just apply to long term affordability either. It also applies to your short term funding in relation to the source of your mortgage deposit funds. Mortgage lenders will want to know where your mortgage deposit funds have come from and they may even want proof of this before deciding to lend. Why is this? The main reason they want to know this is to satisfy money laundering regulations. They may also be interested in your deposit source for another reason however.
A mortgage deposit shows commitment
Before the onset of the 100% mortgage it was generally accepted that having a mortgage deposit was essential to obtaining a mortgage, firstly to reduce the risk to lenders if the value of a property was to fall, but also to show that the borrower was committed to the mortgage loan. After all, it is likely that a person who has committed their life savings to the purchase of a property would show a much great level of commitment to maintaining the repayments and protecting their investment than a person who hasn’t had to commit any cash at all.
Since the financial crash of 2008-09, the deposit has once again become a big factor in the provision of mortgage lending and the source of the deposit is also put under scrutiny. So what are some acceptable sources of deposit to lenders?
Savings and Investments
This is considered to be an acceptable source of mortgage deposit to all lenders. It is easy to prove where the money has come from and as we discussed a minute ago, it implies that you will take the loan seriously as you’ve committed some – or all – of your cold hard cash to it.
Most lenders will be happy with a deposit which comes from a gift given by a family member or from an inheritance. Beyond this things start to get a little more scrutiny and you will likely be asked to explain where the gift has come from. Most lenders won’t class a gift from a random person as an acceptable deposit source due to the risks of money laundering and fraud.
Unsecured Loan or other borrowing
Some lenders will accept unsecured borrowing such as a personal loan or credit card as an acceptable deposit source and others won’t. This could also have something to do with the commitment issue we mentioned earlier. If you have borrowed the money needed to fund the deposit on your house purchase, then you may be less committed to repaying the mortgage and holding onto your home than you would if you had invested your savings into the property. If the lender does accept an unsecured loan as a deposit source then it is also worth keeping in mind that the monthly repayments will be brought into the affordability equation, which could cause issues. If you are thinking of funding your deposit with a personal loan then it may be worth getting some professional free mortgage advice to find out which lenders will allow an unsecured loan to be used in this way, as not all unsecured lenders will allow a loan to be used for the purpose of a mortgage deposit.
Sale of property or other assets
If you have something of value which you are able to sell in order to fund your deposit like a second property, a car, a boat, a work of art or pretty much anything else that can be legally sold, then this is usually fine with lenders. It should only become a problem if there is a suspicion of money laundering in which case you may be required to provide proof of the source of the funds.
Here we’ve discussed just a few of the acceptable sources of deposit when buying a property but as each lender has its own lending criteria, it is difficult to mention and discuss them all. In answer to the question posed in the title of this post though, the answer is yes. A lender will want to know the source of your deposit and the solicitor will check that it is legitimate, so it is always best to check that the source of your mortgage deposit meets the criteria of a mortgage lender before proceeding with the mortgage and spending money on things like surveys and application fees.