When your mortgage lender requests your bank statements what are they looking for anyway? Learn what you can do before applying for a Mortgage Home Loan to increase your chances of loan approval.
Mortgage lenders take careful time to review your finances before approving or denying you for a home loan. The mortgage lender will want to make sure you have enough money for a down payment and closing costs, and whether you’re able to regularly make your monthly payments. Reviewing your bank statements is a very important part of the loan approval process make sure all your documents and records are sorted and straightforward. If there is anything you are unsure of discuss with your Mortgage Lender right away!
Red Flags Mortgage Lenders Look For?
Overdraft charges
Lenders typically request to review your last two months of bank statements in their evaluation of your loan application. Having a long list of overdraft charges in your account isn’t the best indicator that you’ll be a good borrower. No matter the circumstances, having a history of overdrafts or insufficient funds noted on your statement shows the lender that you might struggle at managing your finances. Before applying for a home loan review your bank statements for overdraft charges. If you have more than a few over the past couple months, hold off on applying for a loan. If there is a reasonable explanation and a one time occurrence, your lender will want a detailed explanation letter why it won't happen again and what led to the over draft charges. If the rest of your finances are in order your mortgage lender may accept the explanation.
Large deposits
Another red flag to lenders is when a bank statement has irregular or lump-sum deposits. This can be seen as suspect because it could appear that those funds are coming from an illegal or unacceptable source. Unless you can provide an acceptable explanation for your large deposit, it’s likely the lender will disregard those funds when determining loan approval. Some loan programs do allow a "GIFT" from a family member for down payment and closing costs, but do not deposit any large amounts in your bank account without discussing it with your lender. Funds from a 401(K) or other sources are acceptable, but would need to be documented properly to be used as assets for your home purchase. As mentioned earlier, discuss this with your mortgage lender on the documentation needed for Loan Approval.
Miscellaneous Payments
One way to help ensure that your bank statement won’t raise any red flags with lenders is by having consistent, tracked payments. If, for instance, you have automatic monthly payments to an individual rather than to a bank, lenders could see that as a non-disclosed credit account. This would be the case if you were to take out a loan from your parents and make car payments to them rather than an actual bank, for example. If you have any consistent Payments out of your Bank Account or Consistent Deposits from a Source other than your Income that was disclosed on your loan application, your mortgage lender will want explanation and documentation.
How to reduce bank statement scrutiny
Be sure to take extra care of your bank transactions for at least a few months before applying for a mortgage loan. Lenders want to know that the money in your account has been there for some time, not just recently deposited. One or two big deposits into your account right before applying could indicate to lenders that the money you claim to have isn’t actually yours or isn’t a “seasoned” asset, meaning the money hasn’t been in your account for at least two months.
At the end of the day, it’s best to start the process of organizing your bank activity and statements prior to applying for a loan. When you start looking for a home, it’s best to have your financial information sorted in that perfect home hits the market and you have to move fast.
If you keep your bank statements top of mind in the initial search phases, you may have an easier time applying for a loan and ultimately securing it. Remember: Underwriters review your accounts once more, just prior to closing. So, be sure to maintain healthy finances throughout the closing process too.
-Hippotecca
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