To explain a cash deposit for a mortgage, write a short letter that identifies the deposit on your bank statement, states exactly where the money came from, and attaches documents that prove it. Lenders are required to verify the source of funds you use for your down payment and closing costs under federal anti-money laundering rules tied to the Bank Secrecy Act and the USA PATRIOT Act.1Federal Deposit Insurance Corporation. Section 8.1 Bank Secrecy Act, Anti-Money Laundering, and Office of Foreign Assets Control The underwriter needs to see that the money is really yours and not an undisclosed loan or funds from an illegal source.
When a Deposit Actually Needs Explaining
Not every deposit gets flagged. The threshold depends on your loan type.
For a conventional loan backed by Fannie Mae, a single deposit counts as “large” when it exceeds 50% of your total monthly qualifying income.2Fannie Mae. Depository Accounts On a $6,000 monthly income, that is $3,001 or more. Freddie Mac uses a similar 50% threshold.3Freddie Mac. Guide Section 5501.1
FHA loans use a much tighter rule. Any single deposit greater than 1% of the property’s adjusted value triggers sourcing.4U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook 4000.1 On a $300,000 home, that is anything over $3,000, regardless of income. FHA borrowers get asked about deposits far more often as a result.
Only the unsourced portion counts toward the threshold. If $2,500 of a $3,000 deposit is a documented tax refund, only the remaining $500 is measured.2Fannie Mae. Depository Accounts Regular payroll deposits that match your pay stubs do not need separate explanation.
Lenders look at the most recent two months of bank statements for a purchase and one month for a refinance.5Fannie Mae. Verification of Deposits and Assets Anything inside that window that crosses the threshold will come back as a condition. Before you apply, read through your statements and mark every deposit that is not a regular paycheck: insurance payouts, tax refunds, transfers between your own accounts, Venmo or Zelle payments, cash deposits. Pulling the paperwork now is faster than hunting for it later.
What to Put in the Letter of Explanation
The letter, sometimes called an LOX, is short on purpose. The underwriter wants a clear sentence or two tying the deposit to its source, backed by documents that match. A workable letter contains:
- Your full name, current address, and loan application number.
- The deposit date as it appears on the statement, the exact dollar amount, and the account that received it.
- A one- or two-sentence statement of where the money came from. For example: “This $5,200 deposit on March 12 represents the proceeds from selling my 2019 Honda Civic to a private buyer.”
- A reference to the supporting documents you are attaching, such as a bill of sale, gift letter, or distribution statement.
Keep it factual. The underwriter is checking for consistency: the letter, the bank statement, and the attachments all have to tell the same story. If a number is off by $50, you will get a follow-up condition and your closing clock keeps ticking. Sign and date the letter, and have any co-borrowers sign it too.
What to Attach for Each Type of Deposit
The letter alone is not enough. Each source has its own documentation standard.
A Gift From Family
You need a signed gift letter that states the amount, names the donor, identifies the donor’s relationship to you, and confirms no repayment is expected.6Fannie Mae. Personal Gifts You also need proof the donor had the money and that it moved to you: a copy of the donor’s check with your deposit slip, evidence of an electronic transfer from the donor’s account, or the donor’s withdrawal slip paired with your deposit receipt.
Fannie Mae accepts gifts from relatives (by blood, marriage, adoption, or legal guardianship), domestic partners, fiancés, and people with a long-standing family-like relationship with you.6Fannie Mae. Personal Gifts A casual friend may not qualify.
Sale of a Vehicle or Other Personal Property
You need a bill of sale or a signed statement from the buyer, plus proof you received the money. The buyer cannot also be involved in your home purchase or your mortgage.7Fannie Mae. Sale of Personal Assets If the sale brought in more than 50% of your monthly qualifying income, the lender also needs an independent valuation of the item, such as a recognized pricing guide for a car. The lender uses the lower of the valuation or the sale price when counting the funds.
A Retirement Account Withdrawal
Provide the distribution statement from your plan administrator or investment firm showing the gross amount, any taxes or penalties withheld, and the net amount. The net has to match the deposit on your bank statement. Any gap between the two triggers more questions.
Cryptocurrency Proceeds
Crypto is eligible for your down payment, closing costs, and reserves, but only after it has been converted to U.S. dollars and deposited into a U.S.-regulated financial institution.8Fannie Mae. Virtual Currency You need documentation showing the funds came from your virtual currency account and were exchanged into dollars before closing. One boundary worth knowing: virtual currency cannot be used directly as the earnest money deposit on the purchase contract.
A Transfer From a Business Account
If you are self-employed, funds from a business account can be used, but you have to be listed as an owner on the account.2Fannie Mae. Depository Accounts The account gets verified like any personal depository account. If you also use that business’s income to qualify for the loan, expect the underwriter to look at whether pulling money out damages the business’s ability to keep producing that income.
Physical Cash Is the Hard Case
If the deposit the underwriter flagged is actual currency you walked into the bank and deposited, you have the toughest problem. Cash leaves no paper trail, so there is usually nothing to document. Fannie Mae does not accept cash-on-hand as a valid source of down payment or closing cost funds for a standard conventional loan.9Fannie Mae. Anticipated Savings and Cash-on-Hand A narrow exception exists for HomeReady mortgages, which are designed for lower-income borrowers and allow cash-on-hand under specific conditions.
The practical fix is timing. Lenders generally treat funds as “seasoned” once they have been in your account long enough to fall outside the statement review window. If your cash deposit lands more than 60 days before you apply for a purchase loan, it typically will not need separate sourcing. If you keep savings at home and you know a mortgage is coming, deposit the cash well in advance.
If You Cannot Document a Deposit
An unsourced deposit does not automatically kill your application. The underwriter subtracts the unsourced amount from your verified assets and underwrites with the lower number.2Fannie Mae. Depository Accounts If what remains still covers your down payment, closing costs, and any required reserves, the loan moves forward.
If the deduction drops you below what the program requires, you will either be denied or asked to bring in additional documented funds before closing. The cleanest way to avoid being in that spot is to keep records of every non-payroll deposit in the months leading up to your application.
Do Not Reclassify a Loan as a Gift
Calling a personal loan a “gift,” fabricating a bill of sale, or giving false information about where funds came from is mortgage fraud. Knowingly making a false statement on a mortgage application or to a federally related lending institution carries a penalty of up to 30 years in prison under federal law.10GovInfo. 18 USC 1014 – Loan and Credit Applications Generally A $10,000 “gift” that is actually a loan you agreed to repay sits squarely inside that statute. Lenders also re-verify asset documentation in post-closing quality control reviews, and a loan found ineligible afterward can be called due or referred for investigation.11Fannie Mae. Lender Quality Control Programs, Plans, and Processes If you cannot source a deposit honestly, exclude it and come up with the funds another way.
Once your letter and attachments are in the underwriter’s hands, respond quickly to any follow-up conditions. Each round of back-and-forth adds days. And if you are still early in the process, the single most useful move is to stop making unusual deposits: no account-to-account transfers, no cash drops, no large incoming payments for the next 60 days. A quiet statement is the easiest one to clear.