The Quick Read: Every dollar going into the purchase has to be traced to a source the underwriter accepts. That means two months of full-page statements, a clear explanation for any large or unusual deposit, and paper for each gift or earnest money payment. Payroll deposits and transfers between your own accounts rarely need a letter. A flagged deposit does, and unverified funds can’t be used at all.
“Deposit” gets used three ways in this business. It can mean the down payment, the earnest money check you write with the contract, or a credit that shows up on a bank statement. This article covers all three, because underwriters look at all three.
Key Takeaways
- Funds used for the down payment, closing costs and reserves must be verified. Unverified money is not usable.
- Only deposits flagged as large, and needed to close, get sourced. Routine payroll deposits don’t.
- A gift needs a signed letter, proof the donor had the money or that it moved, and an acceptable donor.
- Earnest money must trace back to your own account.
- Cash kept at home is hard to use. Move money into an account early.
Conventional payment estimate
The starting figures are an example price at the first-time buyer’s minimum down payment. Replace them with yours.
Editable benchmark: 7.32% as of October 22, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a conventional loan quote.
Estimate seeded at the low end of Fannie Mae’s published range (0.58%–1.86% a year); the insurer prices the actual premium on the score and the leverage. Applies only above 80% loan-to-value.
Illustrative starting assumptions: a $350,000 price, the first-time buyer’s minimum down payment, a thirty-year term at the current Freddie Mac benchmark, mortgage insurance at the low end of Fannie Mae’s published range, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a conventional loan quote; your rate is set by the lender at lock. The mortgage insurance figure is an editable estimate seeded from Fannie Mae’s published typical range, not a premium quote; the insurer prices the actual premium, and the cancellation month assumes scheduled payments with no extra principal and no change in value. Taxes, insurance and dues are editable estimates; closing costs are not included. Conforming loan limits apply by county. Licensed in sixteen states for consumer mortgages.
Why Underwriters Trace Your Funds
Lenders trace funds because the money you bring is part of the loan’s risk. The file has to show the cash is yours, or a permitted gift, and not an undisclosed loan. Fannie Mae’s Selling Guide says funds in checking, savings, money market and similar accounts can be used for the down payment, closing costs and reserves, but they must be verified. Unverified funds are not acceptable for any of the three.
On a 97% first-time buyer purchase, you bring 3% down plus closing costs. On a 95% standard purchase, you bring 5%. Those are the leverage levels across the wholesale programs Lendmire places files with on a principal residence, subject to lender guidelines and full file review. The CFPB notes that closing costs typically run 2% to 5% of the purchase price on top of the down payment. So the amount you have to document is bigger than the down payment alone.
What Has to Be Documented
Four buckets of money go through verification. Each one has a different paper trail.
| Money | What the file needs | Common snag |
|---|---|---|
| Down payment | Two months of statements | Unexplained large deposit |
| Closing costs | Same statements or gift | Counted twice |
| Reserves | Statements, or a gift (not gift of equity) | Retirement balance not documented |
| Earnest money | Cleared check or wire traced to your account | Withdrawal can’t be traced |
Reserves matter on some files and not others. The automated finding sets what’s needed, and the rules vary by loan type, so a loan officer has to confirm it for your scenario.
How the Underwriting Works, Step by Step
The same sequence shows up on almost every first-time buyer file.
1. The automated run. The lender runs the file through Fannie Mae’s DU or Freddie Mac’s Loan Product Advisor. The findings state how much must be verified and name any large deposits that need sourcing. Freddie Mac’s Guide says its system names the amount of large deposits whose source the borrower must document.
2. The statements. Most files need the most recent two months, every page, in your name. Some automated findings allow one month. Don’t send the odd pages. A missing page is a condition by itself.
3. The deposit screen. The underwriter reads each credit. Payroll deposits, tax refunds and transfers between your own accounts are generally self-explanatory. Anything else gets a question.
4. The paper trail on flagged items. That could be a letter of explanation, a signed gift letter, a bill of sale, or a settlement statement from a prior home sale. The paper has to show where the money came from and that it belongs to you or was given to you properly.
5. The final reconciliation. The automated findings, the underwriter’s conditions and the Closing Disclosure all have to agree with the verified funds. If the Closing Disclosure shows a gift or a seller credit that isn’t in the file, the file stalls.
What Counts as a Large Deposit
A large deposit is a single deposit that’s big compared to your monthly qualifying income. The agencies set the threshold differently. Fannie Mae and Freddie Mac don’t define it in exactly the same way, and the exact test has to be confirmed against the live Guide for your loan. The practical point is the same under both. A paycheck won’t trip it. A cash deposit, a transfer from an account you haven’t disclosed, or a lump from a friend probably will.
There are three common ways to handle a flagged deposit on a purchase:
- Document the source.
- Subtract the unsourced amount from your available funds.
- Verify enough of the deposit that the unverified part falls under the threshold.
If a deposit is a mix of money you can source and money you can’t, only the unsourced part gets tested. And if the source is obvious from the statement, such as a payroll deposit or tax refund, you shouldn’t need more paper.
One note. Large-deposit documentation applies to purchases. It generally does not apply to refinances, though borrowed funds still count.
Building a Letter of Explanation
A letter of explanation should be short and factual. It states what the deposit was, where it came from, the date and the amount. Attach the proof. If it’s a vehicle sale, send the bill of sale and the proof of payment. If it’s a bonus, send the pay stub. If it’s a transfer from another account of yours, send that account’s statements too.
Don’t write a story. Don’t guess at dates. If the underwriter asks for a source and the letter says “savings,” the next condition will ask for the savings.
Gift Funds, Step by Step
Gifts are the most common source that goes wrong on a first-time file. They’re also fully usable when the file is clean.
Fannie Mae’s gift rules allow a gift to cover all or part of the down payment, closing costs or reserves on a principal residence. Gifts are not allowed on investment property. A gift of equity from a seller can’t be used for reserves.
Who can give. The donor is a relative, or someone with a familial relationship to you, such as a domestic partner, a fiancé(e), a former relative or a long-standing mentor. The donor can’t be the builder, developer, real estate agent or another interested party in the sale.
What the gift letter says. In these files, a clean letter states:
- the donor’s name, address, phone number and relationship to you
- the date
- the dollar amount or maximum amount
- that the gift needs no repayment
- the property being purchased
What proves the transfer. The lender confirms either that the donor’s account held enough to cover the gift or that the funds reached your account. Accepted evidence typically includes:
- the donor’s check plus your deposit slip
- the donor’s withdrawal slip plus your deposit slip
- the donor’s check to the closing agent
- a settlement statement showing receipt of the donor’s check
Match everything. Names, dates and amounts on the letter, the donor’s statement and your statement have to line up. A letter for one amount and a deposit for a slightly different amount creates a condition.
The bigger the gift, the more the file leans on that paper. And a gift letter alone isn’t enough. The letter says what the gift is. The statements prove it moved.
Where the General Rule Breaks
The basic rules above have edge cases. These are the ones that come up most.
Your own-funds minimum. On a one-unit principal residence above 80% LTV, no own-funds contribution is required under Fannie Mae’s rules, so a gift can cover the whole amount. On two- to four-unit principal residences above 80% LTV, a minimum comes from your own funds, and gifts can supplement after that. Freddie Mac’s rules also vary by property type and occupancy. Confirm the current parameters with a loan officer. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
HomeReady. Fannie Mae’s HomeReady program allows 3% down with no minimum personal contribution, and it allows gifts, grants and community seconds. An income limit of 80% of area median income applies. If every occupying borrower is a first-time buyer, at least one has to complete homeownership education. HomeReady is not limited to first-time buyers, which surprises people. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.
Gift of equity. When the seller gives you equity in the sale, it shows up as a credit on the settlement statement, not as cash in your account. It needs an acceptable donor, and it can’t go toward reserves.
Wedding and graduation gifts. These follow the large-deposit and gift rules. Under Freddie Mac’s rules, funds from a wedding gift have to be on deposit within a set window of the marriage certificate, and the file needs the certificate. Ask your loan officer for the current window before you rely on it.
Household members. A gift from an acceptable donor who has lived with you for a period can sometimes count as your own funds. This is a narrow rule. Don’t plan around it without confirming it.
Non-borrowing purchaser. If someone who isn’t on the loan holds funds, that money is treated as a gift and follows the gift rules.
New accounts. An account opened shortly before verification can trigger extra documentation, especially under Freddie Mac’s rules. Don’t open a new account and move everything in the week before you apply.
Cash on hand. Cash kept at home is generally not accepted as a source. If you have it, deposit it early and expect questions. Even then, expect to explain where it came from.
Occupancy. The gift rules apply to principal residences and second homes. They do not apply to investment property.
Earnest Money
Fannie Mae’s earnest money rule treats the contract deposit as an acceptable source for the down payment and closing costs. Your bank statements need to show the average balance over two months was large enough to support the deposit. If a canceled check is the evidence, the statements have to run through the date the check cleared.
Two failure modes. First, the withdrawal can’t be traced to your account, so the lender asks for more proof the money changed hands. Second, the earnest money gets counted again as cash to close. If your statements show the deposit leaving, don’t also count it as money still in the account. Large deposits, or deposits above what’s customary locally, get a closer look.
A Worked Example
Say a first-time buyer applies at 97% LTV with two months of statements. Walk through what the underwriter sees. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.
- Payroll deposits, twice a month. Fine, no letter needed.
- A transfer from the buyer’s own savings account. Fine, if the savings statements are in the file.
- A deposit from a parent, large relative to monthly income. This is flagged. It needs a gift letter, the parent’s statement or proof of transfer, and the amounts must match.
- A cash deposit from selling a used vehicle. This is flagged. It needs a bill of sale and proof of payment.
- A tax refund. The source is clear, so this one is fine.
- The earnest money withdrawal. Check that it traces to the account and isn’t counted twice.
That’s three clean items, two that need paper, and one to check. Most files look like this.
What the Decision Looks Like in Practice
Before you apply, move gift money and cash into your account if you can. The less that arrives mid-process, the fewer flags. Keep every page of every statement. Don’t make large cash deposits. Don’t borrow against anything without telling your loan officer, because borrowed funds and their liability count.
At application, tell the loan officer about every source. A gift they know about at the start is a letter. A gift they discover in underwriting is a condition.
When a condition arrives, answer it completely in one reply. Send the letter, the proof and the statements together. A partial answer produces a second condition. Lendmire’s piece How to Keep a First-Time Buyer’s Conventional Loan on Schedule covers how to handle conditions as they arrive.
Funds also tie to the appraisal. The appraisal doesn’t change how a deposit is documented, but it can change how much cash you need. If the value comes in low and the loan amount stays the same, the down payment goes up, and your verified funds must cover the larger amount.
Mortgage insurance applies above 80% LTV. The CFPB says buyers who put down less than 20% likely pay it, and it adds to monthly costs. Published typical annual premiums run 0.58% to 1.86% of the balance, a range and not a quote. You can request cancellation at 80% of the original value with good payment history, and the servicer must end it automatically at 78%. Lendmire’s piece Does PMI Cancel Itself on a First-Time Buyer’s Conventional Loan? covers that in detail. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
Credit matters too. The wholesale conventional programs start at a 620 decision score, with a 50% total ratio ceiling on automated findings, subject to lender guidelines. Those figures sit alongside the funds question. A clean deposit file doesn’t replace the credit review.
If you’re weighing a first-time purchase, Lendmire’s conventional loan programs are one place to start.
Key Terms Defined
Sourcing. Showing where a deposit came from with a document, not just a statement.
Verified funds. Money the lender has confirmed through statements or other paper and can count toward the purchase.
Large deposit. A single deposit big enough, compared with your monthly qualifying income, that the lender asks where it came from.
Seasoning. How long money has sat in your account. Seasoned funds usually draw fewer questions, but they don’t stop an underwriter from asking about something unusual.
Gift of equity. A seller’s credit toward the purchase, shown on the settlement statement, not cash.
Mistakes That Stall Files
- Sending partial statements.
- Depositing cash right before applying.
- Accepting a gift from the seller’s agent or builder.
- Handing over a gift letter with no transfer proof.
- Letting the earnest money get counted twice.
- Moving money between accounts without keeping both sets of statements.
- Assuming a letter will fix a deposit that has no source behind it.
If you are buying a home and want to see whether a conventional loan fits your file, Lendmire can help you compare the options and what each one asks of the file. Reach the team at 828-256-2183 or request a quote. Every program figure here is subject to lender guidelines and full file review, and nothing here is a commitment to lend.
Frequently Asked Questions
Does every deposit on my statement need a letter?
No. Only deposits flagged as large, and needed to close, get sourced. The automated findings name the deposits that need paper.
Can a gift cover my entire down payment?
Often, yes, on a one-unit principal residence above 80% LTV under Fannie Mae’s rules, since no own-funds contribution is required there. Two- to four-unit properties are different. A minimum comes from your own funds first. The donor must be acceptable, and the letter and transfer proof must be in the file.
Is a gift letter enough by itself?
No. The letter states the gift and that it needs no repayment. The lender also has to verify that the donor’s account held the funds or that the money reached your account. Names and amounts have to match across every document.
Can I use cash I’ve saved at home?
Generally not as-is. Cash on hand is hard to verify and is generally not accepted as a source. Deposit it early, and expect the underwriter to ask where it came from. Larger amounts get more scrutiny.
Do I need 20% down on a conventional loan?
No. The CFPB says conventional loans can require as little as 3% down. Above 80% LTV, mortgage insurance applies. Leverage figures are subject to lender guidelines.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage broker licensed for consumer lending in 16 states. Lendmire arranges FHA, VA, conventional and jumbo purchase and refinance loans through wholesale lenders; every file is underwritten by the lender under the applicable program guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Fannie Mae Selling Guide B3-4.2-02 Depository Accounts
2. CFPB: Figure out how much you want to spend
4. Fannie Mae Selling Guide B3-4.3-04 Personal Gifts
5. Fannie Mae HomeReady Mortgage page
6. Fannie Mae Selling Guide B3-4.3-09 Earnest Money Deposit
This article is part of Lendmire’s conventional loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How to Document a Large Deposit for a Conventional Loan · HomeReady vs Standard Conventional Loan for a First-Time Buyer · How Waiting Compares to Buying Now on a First-Time Conventional Loan
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.