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Lenders have a regulatory requirement to obtain evidence about a borrower’s source of funds. This can be for the:
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Deposit for the purchase of a property
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Refinance and capital raising applications where there is no current lender and the property was purchased with the borrowers’ own funds or that of a private lender
Why are lenders asking for this?
This can add additional paperwork for the borrower’s mortgage or loan application and seem bureaucratic. Still, borrowers need to appreciate that the proceeds of crime are often channelled into the property, so it’s upon the broker and the borrower to prove the source of funds to the lender.
Lenders face significant fines (running into millions of pounds) from regulators for failing to undertake these checks, so lenders are increasingly asking for an accurate source of funds.
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What do lenders require?
To ensure that the lender’s requirements are satisfied quickly and efficiently, we have provided the points below to help our borrowers understand what is required:
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An explanation in email or writing from the borrower explaining the ultimate source of the funds—where did these funds come from initially?
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Understand that “Source of deposit” differs from “Proof of deposit”
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Proof of deposit for a purchase application is a snapshot of time proving the deposit funds are in the borrower’s account ready for the purchase. This can be proven by a single bank statement in the name of the borrower covering a 30-day period
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The source of the deposit is an audit trail of funds, which can involve many bank accounts and other documentation to prove where these funds originated from
Two examples of an acceptable borrower explanation
- “The source of the £75,000 deposit comes from my personal income and a loan from a private investor. £35,000 is from personal income built up over an approx 2 year period. I regularly save £1500 per month, and the 6-month bank statement for the account ending 4556 details the start of my savings in June 2023 and then increase each month until Dec 2023. The remaining £40,000 came from a loan from a private lender. The funds can be seen being credited to my the account ending 4556 from the lender BTL Ltd. I have attached a copy of the loan agreement.”
- “The property was bought with £200,000 of savings held by the company in Dec 2023; the savings came from a refinance of another property. I enclose bank statements for the 3-month period from October to December 2023, with the cash savings being held on deposit and eventually sent to my solicitor, LA Law, on the 12th of December. The savings originated from refinancing another property completed in June 2023. The bank statement attached for June 2023 shows the funds being credited by the lender TMW Ltd for £202,546. I attached a mortgage offer from the lender.”
Examples of documentation required to support the explanation
If you can provide this written explanation and audit trail/documentation upfront in the application process, the lender will process it quicker and more efficiently.
| Source of funds from | Example of what a lender can request in addition to a written explanation from the borrower |
| Long term savings / cash balances | Some lenders ask for 3 months, and some lenders ask for 6 months’ bank statements proving the deposit funds in a bank account. We recommended providing 6 months to avoid the need to go back and ask the borrower for more bank statements |
| A refinance of another property | Provide a copy of the completion statement from the solicitor or the mortgage offer together with a bank statement showing the funds being credited to a bank account. If the funds are then transferred to another bank account, the lender will ask to see bank statements showing the trail of funds until they eventually reach the bank account of the borrower |
| The sale of a property | Provide a copy of any correspondence from the solicitor, the completion statement and a bank statement showing the funds being credited into a bank account |
| Build up of funds from employment income or income generated from a business | Provide a copy of Payslip / P60 or accounts from the business showing the income being generated |
| From a private investor / private loan or a gift | Provide a written explanation of the private investor/borrower/donor and the relationship to the borrower, a copy of the loan/investment/gift agreement. Some lenders can ask for an explanation as to how the private lenders / investor / donor accumulated the funds |
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