Where Can Funds for Closing Come From? | Washington Home Buyers

When you’re buying a home with a mortgage, your lender needs to know where every dollar used for the down payment, closing costs, and reserves is coming from. This isn’t optional — it’s a federal requirement, and it applies regardless of loan program. The lender has to document, verify, and approve the source of your funds before your loan can close.

This guide covers what counts as an acceptable source of funds for closing in Washington State, what documentation is typically required, and a few sources that won’t fly with lenders — no matter how legitimate they feel to you.

Why Lenders Verify the Source of Your Funds

Lenders aren’t being nosy for the sake of it. They’re required to confirm that your funds are genuinely yours (or an approved gift), that they haven’t been borrowed without disclosure, and that they’re not coming from anyone with an undisclosed interest in the transaction — like the seller or a real estate agent.

The standard documentation request is two months of statements for every account you’re using for closing. If large deposits appear on those statements that aren’t obviously a paycheck or regular deposit, the underwriter will ask you to document where that money came from. This applies even if the money is legitimately yours — a $10,000 transfer from another account of your own will need to be explained and traced.

For conventional loans, a “large deposit” is generally defined as any single deposit exceeding 50% of your total monthly qualifying income. FHA uses a different threshold. Either way, the rule is: if it’s on your statement, be prepared to explain it.

What Counts as an Acceptable Source of Funds

The good news: there are many acceptable sources of funds for closing. Here’s a breakdown of the most common ones.

Checking and Savings Accounts

The most straightforward source. Two months of statements are standard. Whatever appears as the ending balance on your most recent statement is what the lender will use — so avoid large unexplained deposits in the weeks before applying.

Retirement Accounts (401k, IRA, etc.)

Funds from retirement accounts are acceptable, but there are a few things to know. Lenders will typically use 60–70% of the vested balance to account for potential early withdrawal taxes and penalties. If you’re taking a loan from your 401k rather than a withdrawal, the repayment will be counted as a monthly liability in your debt-to-income ratio. Either way, you’ll need recent statements showing the account balance.

Stocks, Bonds, and Investment Accounts

Brokerage and investment accounts are acceptable sources. As with retirement accounts, lenders may apply a discount to the balance (typically 70%) to account for market fluctuation and potential capital gains taxes. You’ll need recent statements, and if you liquidate the account to fund closing, you’ll need documentation showing the proceeds transferred into your bank account.

Gift Funds from Family Members

Gift funds are an accepted source of closing funds for most loan programs — but the rules vary. For FHA loans, the entire down payment can be gifted. For conventional loans with less than 20% down, the borrower may need to contribute a minimum percentage of their own funds (this varies by program — HomeReady and Home Possible are more flexible than standard conventional). A gift letter is always required, along with documentation showing the funds came from the donor’s account and were not a loan. Cash on hand is never an acceptable form of gift funds — all transfers must be traceable through the banking system.

Proceeds from the Sale of Your Current Home

If you’re selling a home to buy another, the net proceeds from that sale are an acceptable source of funds. Your lender will need a copy of the settlement statement (Closing Disclosure) from the sale showing the net amount you received. If both transactions are closing simultaneously, coordinate with your loan officer well in advance.

Bridge Loans

If you’re buying a new home before your current one sells, a bridge loan allows you to borrow against your existing home’s equity to fund the down payment or closing costs on the new purchase. Unlike undisclosed borrowing, a bridge loan is fully documented and the repayment is factored into your debt-to-income ratio. Bridge loans are short-term by design — they’re typically paid off when your current home closes. They’re worth exploring if you have substantial equity and need flexibility on timing, though they do come with their own costs and qualifying requirements. Let’s talk if this is your situation.

Proceeds from the Sale of Personal Property

Sold a car, jewelry, collectibles, or other personal property to help fund closing? This is acceptable — but you’ll need documentation of the sale (a bill of sale or similar) and evidence that the funds were deposited into your bank account.

Down Payment Assistance Programs

If you’re using a Washington State down payment assistance program — such as those offered through the Washington State Housing Finance Commission (WSHFC) — those funds are an acceptable and common source of closing funds. DPA programs typically come in the form of a second mortgage (often at 0% interest, deferred for 30 years) or a grant. Your lender will need to confirm the program is approved for use with your loan type.

Seller Closing Cost Credits

If negotiated in your purchase and sale agreement, the seller can contribute toward your closing costs and prepaids. Sellers cannot contribute toward your down payment. The maximum allowed seller contribution varies by loan program and your down payment amount — ranging from 3% to 9% of the purchase price for conventional loans, and up to 6% for FHA. Seller credits don’t reduce your out-of-pocket cash the same way a gift does, but they can significantly reduce the amount you need to bring to closing.

Inheritance

Inherited funds are acceptable — you’ll need documentation showing the source, such as a copy of the estate distribution, probate documents, or a letter from the estate attorney along with bank statements showing the deposit.

Cryptocurrency

Cryptocurrency can be used for funds for closing, but only after it has been converted to U.S. dollars and deposited in a U.S.-regulated financial institution. Fannie Mae and Freddie Mac require documentation from the exchange confirming you as the legal owner, plus bank statements showing the funds transferred out of the exchange and into your account. For FHA loans, the converted funds generally need to be seasoned in your bank account for at least 60 days. If you’re planning to use crypto proceeds, start the conversion process early — this is one of the more documentation-intensive sources.

Income Tax Refunds

A federal or state tax refund deposited into your bank account is an acceptable source of funds. The deposit will appear on your bank statement and may need to be explained, but a copy of your tax return showing the refund amount is typically sufficient documentation.

What Is NOT an Acceptable Source of Funds

Cash on hand — sometimes called “mattress money” — is never acceptable. Lenders cannot verify the source of cash that has never touched a bank account, so it cannot be used for a down payment or closing costs under any loan program. If you have cash savings, get them into a bank account as early as possible — ideally 60–90 days before you plan to apply for a mortgage — so the funds can be properly seasoned.

Similarly, borrowed funds that aren’t disclosed are not acceptable. If you’re planning to take out a personal loan, a loan from family, or a cash advance on a credit card to help fund closing, that must be disclosed to your lender. Undisclosed liabilities discovered during underwriting or credit re-verification just before closing can derail a transaction.

Seasoning: Why Timing Matters

Lenders typically want to see funds “seasoned” — meaning present in your account — for at least 60 days before closing. This is why the two-month bank statement request is standard. If large deposits appear within that two-month window that can’t be clearly sourced, it creates documentation work that can slow or complicate your approval. NOTE: Some programs do allow for one month’s bank statements but it’s best to plan on having two months.

If you’re planning to buy a home in the next three to six months and you have funds sitting in cash, in a brokerage account, or with a family member who intends to gift them, now is the time to get those funds into a bank account and let the clock run.

Every Situation Is a Little Different

The list above covers the most common sources, but mortgage guidelines are program-specific and lender-specific. FHA, VA, USDA, and conventional loans each have their own rules about which sources are allowed and how much documentation is required. Some lenders also have their own overlays — additional requirements on top of what the program technically allows.

The most important thing you can do before buying a home is have a candid conversation with your mortgage advisor about where your funds are coming from — before you start writing offers. Surprises during underwriting are almost always avoidable with a little early planning.

If you’re buying a home anywhere in Washington State and want to talk through your asset picture and down payment options, I’d love to help.