How can my bank statements affect my mortgage application?

Why does the lender need my bank statementsand how do I obtain them?

The reason a lender will need to see your bank statements is to learn more about you as a person and what your spending habits are like. How you have acted lately and the presentation of this on your bank statements can be the difference in how much a lender will let you borrow, if anything at all.This is down to risk. A lender needs to know you’re responsible with your money and can be trusted to handle finances appropriately. After all, a mortgage is likely the biggest financial commitment you will ever make in your life and is not something to be taken lightly.Your bank statements are easily obtained either in the post from your bank, over the counter from your local bank, or as often seen these days, as a printable version from your bank’s online platform. 

Some Things to Keep in Mind

The document collection part of the mortgage loan process can be kind of daunting if you don’t know what to expect. Here are a few more things you should know as you’re gathering documents for your lender.

  • If you have a family member who wants to help you pay for your new home, keep in mind that the person giving you this awesome gift may have to provide documentation of the transfer of funds, usually with a bank statement or withdrawal and deposit slips as well as a letter confirming that the gift doesn’t need to be repaid.
  • If you apply and take out another loan while in the process of getting your home loan, the mortgage lender will have to take that new loan into account and recalculate how much you qualify for. In other words, avoid getting new loans or credit cards while you’re in the process of getting a mortgage.
  • When applying for a mortgage, it can be helpful to have all the documents you need ready to go, to make sure the process goes as quickly and smoothly as possible.
  • Your lender may do a check on your bank account more than once. This means it’s important that you don’t make any drastic changes to your finances after being approved for a loan.

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Why do mortgage companies need bank statements?

Lenders request bank statements to determine your eligibility for a loan or to satisfy the requirements of government-backed mortgages. To do so, they look for evidence of specific financial information. 

Cash available

Mortgage companies want to know that you have enough money saved to cover your down payment. Most lenders also require borrowers to have a few months’ worth of payments stashed in case you lose your job.  

Assets are sourced and seasoned

Lenders like to see that your assets are both sourced and seasoned. In other words, they want to know where your money comes from, which is the source, and they want to know that it’s been there for a while, making it seasoned. Sourcing and seasoning help prevent fraud and money laundering. It also ensures that you’re not using a third-party loan to cover your down payment costs.   

Closing costs

Lastly, your lender wants to ensure that you have enough liquid cash to cover your closing costs in addition to your down payment. Closing costs usually range from 2-5% of your loan’s total cost.  

Overdrafts In Bank Statements Can Be Deal Breaker

Overdrafts can be a deal-breaker for any mortgage loan applicant. Lenders do not want to see any overdrafts from mortgage loan applicants in the past 12 months PERIOD!  Whether it is a $10 dollar overdraft or a $1,000 overdraft, an overdraft is an overdraft under the eyes of an underwriter. Borrowers with multiple bank accounts and have some bank accounts with overdrafts, do not submit the bank statements with overdrafts. There are solutions to solve the bank statement overdraft problem.

3 things mortgage lenders don’t want to see on bank statements

You might want to take a look at your bank statements with a mortgage underwriter’s eye before submitting them to your mortgage company.

That’s because the lender looks for red flags that, if found, can require lengthy explanations.

Mortgage underwriters are trained to uncover unacceptable sources of funds, undisclosed debts, and financial mismanagement when examining your bank statements.

Here are three things you can look for on your bank statements that might turn up a red flag for a financial institution.

1. Bounced checks

If your checking account is littered with multiple overdrafts or NSFs (non-sufficient funds) charges, underwriters are likely to conclude that you’re not great at managing your finances.

Mortgage rule-making agency Freddie Mac says that additional scrutiny is required when bank statements include NSF fees.

FHA loans require lenders to manually re-approve borrowers with NSFs, even if the borrower has already been approved by a computerized system.

2. Large, undocumented deposits

Outsized or irregular bank deposits might indicate that your down payment, required reserves, or closing costs are coming from an unacceptable source.

The funds might be borrowed. For instance, you could take a cash advance on your credit card, which might not show up on your credit report.

A large deposit could also indicate an illegal gift. A home buyer can’t take help from a party who stands to gain from the transaction — like the home seller or real estate agent.

So, what’s considered a “large” bank deposit by mortgage lenders?

  • Fannie Mae’s Selling Guide says, “When bank statements (typically covering the most recent two months) are used, the lender must evaluate large deposits, which are defined as a single deposit that exceeds 50% of the total monthly qualifying income for the loan.”
  • Likewise, Freddie Mac lists “recent large deposits without acceptable explanation” as red flags about which lenders should follow up with the applicant

If you can’t prove through documentation that the source of a big deposit is acceptable under the program guidelines, the lender must disregard the funds and use whatever is left to qualify you for the loan.

If the verified funds aren’t enough to qualify you for a loan, you’ll need to save another chunk of cash — from an acceptable source.

Acceptable undocumented deposits

That said, borrowing a down payment is allowed by most loan programs. You just have to disclose where the down payment money came from. This must be considered an “acceptable” source, like:

In cases of gifted money, your mortgage company will require a gift letter that explains the funds are freely given and are not a loan.

If you did receive a large deposit recently — and it wasn’t from one of these sources — you may want to wait 60 days before applying for a mortgage.

At that point, the funds become “seasoned,” meaning they are now your funds, despite the source.

It’s still not a good idea to take funds from a party with interest in the transaction. That breaks a myriad of other rules.

But if your family member paid you back for a recent vacation, or you sold a car to your aunt and didn’t document it, waiting 60 days could be a solution.

3. Regular payments, irregular activities

Watch out for a monthly payment that does not correspond to a credit account disclosed on your application.

Typically, your credit report will pull in your credit cards, auto loans, student loans, and other debt accounts. But some creditors don’t report to the major credit bureaus.

For instance, if you got a private, personal, or business loan from an individual instead of a financial institution, those debt details may not show up on your credit report.

The monthly $300 automatic payment on your bank statement, however, is likely to alert the lender of a non-disclosed credit account.

Will gambling affect my chances of getting a mortgage?

This is a question we find ourselves being asked on a regular basis. All too often do customers find themselves stuck when they have a history of gambling behind them. The occasional bit of fun is harmless, but if you are frequently betting large amounts of money, whether you’re making it back or not, a lender will not look at your situation favourably at all.To learn more, please see our article on “Do Gambling Transactions Look Bad on My Bank Statements? 

How do lenders verify bank statements?

Lenders verify bank statements in several ways. Some scrutinize your paper documents, while others accept electronic documentation. Often, once they have your statements in hand, the lender then contacts the bank to verify their validity. A few import income and asset information digitally, eliminating your role as the middleman. 

What Do Lenders Look For On Bank Statements?

When you apply for a mortgage, lenders look at your bank statements to verify where the money comes from, and that you can be trusted with the loan amount. Lenders need to ensure that borrowers have enough money in their accounts to meet the loan obligations.

 Here are a few factors that lenders look for:

  • Regular income
  • Consistent monthly payments
  • Expense history
  • Cash reserves and money in your account
  • No bounced checks or overdrafts
  • No direct debits
  • No large deposits, withdrawals or gifts without a documented source

Gift Funds Needs To Be Sourced

Gift funds from a relative or family member are allowed for FHA Loans. A home buyer can get 100% gifted funds from a family member and/or relative for both the down payment and closing costs for their home purchase. However, the gift funds need to be sourced. Mortgage Underwriters will require a copy of the canceled check from the donor. The donor needs to provide 30 days of bank statements. Needs to provide how the funds leaving the donor’s bank account and the deposit to the recipient’s bank account in order for the gift funds to be valid. A gift letter needs to be signed and dated by the donor stating that the gift funds are not a loan and solely a gift and there will not be a repayment.

Why Verification of Bank Statements is Needed

Lenders have the discretion to request your bank statements or seek VOD from your bank; some lenders do both. Lenders that use both VODs and bank statements to determine mortgage eligibility do so to satisfy the requirements of some government-insured loans where the source of down payment funds must be known for mortgage approval.

In performing the verification process, some lenders may dismiss rare account overdrafts. However, a consumer with numerous overdrafts within the two- to three-month period before closing on a home may be considered a risk to the bank.

Why Do Lenders Need Bank Statements?

Mortgage companies or lenders use bank statements during the application process to verify your income, assets and eligibility for a loan. If you mentioned on your loan application that you are paid twice a month, the lender will want to see the direct deposits from your employer on your bank statements. The lender will also look at the debt payments you disclosed on your loan application and make sure they match up with any payments on your bank statements. Lenders ultimately review bank statements to make sure you have enough money to reliably make your monthly mortgage payments.

Another reason why lenders need bank statements relates to both down payments and closing costs. Lenders will review your bank statements to make sure that you have enough money to pay the down payment and closing costs that come with your loan. If your loan says that you will pay $40,000 as a down payment, the lender will want to see that $40,000 somewhere listed in your assets.

What underwriters look for on your bank statements

The underwriter — the person who evaluates and approves mortgage applications — will look for four key things on your bank statements:

  1. Enough cash saved up for the down payment and closing costs
  2. The source of your down payment, which must be acceptable under the lender’s guidelines
  3. Enough cash flow or savings to make monthly mortgage payments
  4. Cash reserves, which are extra funds available in case of an emergency

An underwriter generally wants to see that the funds in your bank accounts are yours, and not borrowed from someone else (unless via a properly-documented down payment gift).

In other words, any funds used to qualify for the mortgage need to be “sourced and seasoned.”

  • Sourced' means it’s clear where the money came from, and any unusual deposits are explained in writing. Again, large deposits still may require explanation
  • Seasoned' typically means the money has been in your account for at least 60 days. (So the funds should show up on the two months’ bank statements you’re required to provide)

Bank statements also prove to underwriters that you haven’t opened up any credit accounts or created new debt prior to getting the mortgage.

How To Find Your Bank Statements

It’s easy to find your bank statements through your financial institution’s website. Here are a few quick steps, though each financial institution’s website will be slightly different.

Log In To Your Account

Visit your bank or credit union online and log in to your bank account. If you don’t know your login details, you can call your bank’s customer service line and ask for help.

Locate Your Statements

You should see a tab labeled “Documents” or “Statements” on your bank’s home screen. You may have to navigate through a tab labeled “Account Details” first before you see the documents tab.

Download Your Statements

From this tab, you should see a number of links to PDF files labeled “Statement” and the corresponding dates. Find the right statement and download it. Save the files somewhere where you can easily access them. If the filename is a string of numbers and letters, rename it to something that both you and your lender will understand. A name like “February account statement, Bank of America” is perfect. Repeat these steps until you have at least two statements from all of your accounts and deliver them to your lender.

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