When you apply for a mortgage, lenders look at your bank statements to verify that you can afford the down payment, closing costs, and future mortgage payments. And the more straightforward your application file, the more likely you are to be approved. Even if unintentionally, you certainly don’t want to raise any red flags.
Read on to learn how you can avoid common underwriting pitfalls and optimize your chances of mortgage approval.
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Mortgage lenders typically seek two months of recent bank statements during your home loan application process.
You need to provide bank statements for any accounts holding funds you’ll use to qualify for the loan, including money market, checking, and savings accounts.
qualify based on bank statements instead of tax returns. In this case, you must provide the past 12-24 months of bank statements.
However, even in this case, loan officers may still regard large deposits differently.
The underwriter — the person who evaluates and approves mortgage applications — will look for four key things on your bank statements:
Your loan officer will typically not re-check your bank statements right before closing. Mortgage lenders only check those when you initially submit your loan application and begin the underwriting approval process.
debt-to-income ratio (DTI). This could seriously affect your loan approval and interest rate.
In addition, if anything changes with your income or employment prior to closing, let your mortgage lender know immediately. Your loan officer can decide whether any changes to your financial situation will impact your loan approval and help you understand how to proceed.
You might want 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.
If your checking account shows multiple overdrafts or NSFs (non-sufficient funds) charges, underwriters will likely conclude that you’re not managing your finances well.
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 mortgage borrowers with NSFs, even if a computerized system has already approved them.
Outsized or irregular bank deposits might indicate that your down payment, required reserves, or closing costs are coming from an unacceptable source.
A large deposit could 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 a “large” bank deposit to mortgage lenders?
If you can’t prove through documentation that the source of a big deposit is acceptable under the loan program’s guidelines, the mortgage lender must disregard the funds and only use verifiable funds to qualify you for the home 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.
That said, you may borrow a down payment by most loan programs. You just have to disclose where the down payment money came from. This must be considered an “acceptable” source, such as:
If you received money from someone else, a mortgage lender requires a gift letter explaining the funds are freely given and 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.
Obtaining funds from a party with interest in the transaction is not a good idea. 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.
Another thing to be cautious about regarding bank statements is monthly payments that don’t align with a disclosed credit account on your mortgage 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, such as Equifax or Experian.
For instance, if you got a private, personal, or business loan from an individual instead of a financial institution, those debt details may not appear on your credit report.
However, the monthly $300 automatic payment on your bank statement will likely alert the lender of a non-disclosed credit account.
Verifications of Deposit, or VODs, are forms that lenders can use instead of bank statements. You sign an authorization allowing your banking institution to hand-complete the form, indicating the account owner and current balance.
Mortgage lenders need bank statements to ensure you can afford the down payment, closing costs and your monthly mortgage payment. Lenders use all types of documents to verify the amount you have saved and the source of that money. This includes pay stubs, gift letters, tax returns, and bank statements. Loan officers want to see that it’s really your cash — or at least, cash from an acceptable source — and not a discreet loan or gift that makes your financial situation look better than it really is.
How many bank statements do I need for a mortgage?Mortgage lenders typically want to see the past two months’ worth of bank statements.
Do I have to disclose all bank accounts to a mortgage lender?If a bank account has funds you’ll use to help you qualify for a mortgage, you must disclose it to your lender. That includes any account with savings or regular cash flow which will help you cover your monthly mortgage payments.
What do underwriters look for on bank statements?When underwriters look at your bank statements, they want to see that you have enough money to cover your down payment and closing costs. Some types of loans require a few months’ worth of mortgage payments leftover in the account for emergency cash reserves. In other words, the upfront costs can’t drain your account.
What are sourced and seasoned funds?Underwriters also want to see that all the funds in your accounts have been “sourced and seasoned.” That means the source of each deposit is acceptable and verified, and the funds have been in the account long enough to show they weren’t a last-minute loan or a questionable deposit.
Do mortgage lenders look at savings?Yes. A mortgage lender will look at any depository accounts on your bank statements — including checking and savings accounts, as well as any open lines of credit.
Why would an underwriter deny a loan?There are plenty of reasons underwriters might deny a home purchase loan. The two most common are insufficient credit and a high debt-to-income ratio. As far as bank statements are concerned, an underwriter might deny a loan if the sources of funds can’t be verified or aren’t “acceptable.” This could leave the borrower with too little verifiable cash to qualify.
How long does it take an underwriter to make a decision?Underwriting times vary by lender. The time it takes an underwriter to approve your mortgage could be as little as two or three days, or as much as a week. Big banks tend to move more slowly than non-bank mortgage lenders.
How far back do loan officers look at bank statements?The timeframe for bank statement review by loan officers can vary based on the type of loan, the lender’s policies, and specific circumstances. Generally, they typically request bank statements covering the most recent two to three months.
What are red flags on bank statements?Red flags on bank statements for mortgage qualification include large unexplained deposits, frequent overdrafts, irregular transactions, excessive debt payments, undisclosed liabilities, and inconsistent income deposits, which prompt lenders to scrutinize the borrower’s financial stability and may require further explanations.
Bank statements are just one of many factors lenders look at when you apply for a mortgage.
Almost all areas of your personal finances will be under the microscope; including your credit score, existing debts, and any source of income you’ll use to qualify for the loan.
These factors help determine how much house you can afford, the loan amount, and interest rate. The cleaner your financial situation, the better deal you’re likely to get on your new home loan or refinance.
Authored By: Tim Lucas The Mortgage Reports EditorTim Lucas spent 11 years in the mortgage industry before moving into the world of digital media. He's helped thousands of families buy and refinance real estate at banks and mortgage companies and now continues that mission through industry-leading content. Tim has been featured in national publications such as Time, U.S. News and World Report, MSN, Scotsman Guide, and more.
Updated By: Aleksandra Kadzielawski The Mortgage Reports EditorAleksandra is the Senior Editor at The Mortgage Reports, where she brings 10 years of experience in mortgage and real estate to help consumers discover the right path to homeownership. Aleksandra received a bachelor’s degree from DePaul University. She is also a licensed real estate agent and a member of the National Association of Realtors (NAR).