How to Complete a Third-Party Check Transaction

While many checks involve a straightforward exchange between two parties, a third-party check is transferred to a third individual or entity. This transaction introduces additional considerations and steps for all involved parties to ensure a successful transfer of funds.

Defining Third-Party Checks

A third-party check involves three distinct parties: the original drawer, the original payee, and the new payee. The original drawer writes the check, the original payee is the person to whom it was made payable, and the new payee is the individual to whom the original payee transfers the check.

The original payee endorses the check over to the new payee, effectively instructing the drawer’s bank to pay the funds to this new recipient. The new payee then becomes the holder of the check, responsible for presenting it to a financial institution for deposit or cashing.

Requirements for Endorsement

Before endorsing a check to a third party, the original payee must confirm its validity. The check must not be expired, be properly dated, signed by the drawer, and have matching numerical and written amounts. Any significant alterations or tears on the check can lead to its rejection.

The original payee must also verify their identity to the bank. Financial institutions are not obligated to accept third-party checks, and their policies can vary significantly. Some banks may require both the original payee and the new payee to be present during the transaction, while others may refuse such transactions. The original payee remains liable if the check is returned unpaid after endorsement.

How to Endorse a Third-Party Check

Endorsing a check to a third party requires specific phrasing and placement to ensure it is properly transferred. The original payee must use what is known as a “special endorsement.” This involves writing the phrase “Pay to the order of [New Payee’s Full Name]” on the back of the check.

Immediately below this special endorsement, the original payee must then sign their own name exactly as it appears on the “Pay to the order of” line of the check. This signature validates the transfer of the check’s ownership. Both the endorsement phrase and the signature should be placed within the designated endorsement area on the back of the check, typically near the top. It is important to use clear, legible writing and permanent ink to avoid any issues with processing.

Completing the Transaction

Once the original payee has properly endorsed the check to the new payee, the new payee undertakes the steps to deposit or cash the funds. The new payee must also endorse the check themselves, typically by signing their own name below the original payee’s endorsement. This is commonly referred to as a blank endorsement, signifying their acceptance of the funds.

The new payee presents the check to their financial institution for deposit or cashing. During this process, the bank will verify the identity of the new payee, and if the original payee is present, their identity may also be confirmed. Checks can be deposited at a teller window or through an ATM, though mobile deposit for third-party checks may be restricted by some institutions due to verification requirements. Funds from deposited checks, especially third-party checks, may be subject to holds, meaning the money might not be immediately available for withdrawal. These holds can range from a few business days to longer, depending on the bank’s policies and the check amount.