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What do Mortgage Underwriters Look for in Bank Statements?

April 26, 2018 By JMcHood

If we had to pick one area that underwriters spend a lot of time when evaluating a mortgage application, it’s the bank statements. Underwriters can tell a lot from the bank statement. It’s more than a way for them to verify that you have the funds necessary to close the loan.

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Your bank statements also let a lender know how comfortably you can afford your monthly mortgage payment among other things. Keep reading to see what red flags lenders may see on your statements.

Do You Have Enough Money?

First, a lender is going to make sure you have enough money for the down payment and closing costs. If you don’t have enough money, then the loan will not go through. The underwriter’s job would be done until you could come up with the money for the closing costs and down payment.

If you are receiving gift funds, you’ll have to supply the Gift Letter from the donor as well as the donor’s bank statements. Don’t think you’re off the hook with your bank documents, though. The lender will need proof that you deposited the gift funds into your account as well. This still gives them access to your bank documents, allowing them a peek inside your financial life.

Do you Have Large Deposits?

Speaking of gift funds, lenders look very closely at any large deposits you put in your bank account. If the money doesn’t coincide with your regular income, you can bet the underwriter will ask questions. They will flag the deposit and need to source it. In other words, they need proof of where the money originated.

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Let’s say it was something as simple as you sold stocks to help you have enough for a down payment. That’s great, but you have to prove it. You cannot just tell the lender that you sold stock XYZ and put the proceeds in your bank account. You’ll have to show the lender the sale of the stocks, proof of the receipt of the funds, and the deposit ticket for depositing the funds. Every dollar amount must match to the penny, or the underwriter will continue asking questions.

Any large deposits that you cannot source cannot be used. There is too high of a risk that the money is borrowed money and could leave you with a higher debt ratio than the lender assumes.

Do You Have Many Overdraft Charges?

If you consistently overdraft your bank account, it will give the underwriter another red flag. Overdrafts are a sign of poor financial management. This could lead to difficulty securing the loan. Generally, though, the lender only needs the last 2 months of bank statements for loan approval. If you don’t have any overdrafts during that time, you might be okay.

It’s a good rule of thumb to stay within your financial means, though. You don’t want any type of slip up to cause your loan to get tossed out the window. Underwriters are supposed to use your bank statements to make sure you have the cash to bring to the closing that you said you would. It shouldn’t be another way for them to question your ability to afford the loan after you already worked hard to prove that you could afford it.

Your bank statements are supposed to be confirmation to the lender that you can afford the home you agreed to buy. It’s a way to show the lender that the funds you will use are yours or those from a documented gift. Be aware, though, that lenders could use these statements to further scrutinize your income and financial management. Make sure your last two months of bank statements are as clean as possible to ensure that you get the approval you need.

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Reserves and Mortgages: How Much Do You Need to Qualify for a Loan?

February 8, 2018 By Justin

What happens after closing? You start making your mortgage payments, pay your property charges, and so on. Do you have enough funds to cover these expenses in case something unexpected happens? These “leftover funds” are called financial reserves.

Lenders will look into these funds to determine if you have enough set aside before they approve your mortgage. As to the minimum level of reserves required, that will depend primarily on your loan type, property, and borrower profile.

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What Are Reserves?

Reserves are assets that are available to you post-mortgage closing. By available, these assets must be readily convertible to cash for your use, per Fannie Mae, who together with Freddie Mac, is the largest purchaser of mortgages in the secondary market.

To make them more relatable, think of these funds as x months’ worth of your total housing expenses as represented by PITI or PITIA:

  • Principal
  • Interest
  • Taxes
  • Insurance (homeowners insurance, mortgage insurance)
  • Homeowners association dues, other assessments

While they are not as popularly discussed as down payment and closing costs, reserves are an important aspect of your mortgage that you should prepare for, save up if you must.

Eligible or Not Eligible Assets for Reserves

Not all assets are eligible to be considered as reserves. Aside from being liquid assets, they must be redeemed/vested, taken from personal bank accounts, or derived from the sale of an asset.

Aside from cash, these are acceptable sources of reserve funds:

(i) savings/checking accounts, (ii) stocks, bonds, certificates of deposits, trust accounts, or any investments, (iii) the portion of the retirement savings account that has vested, and (iv) the cash value of a vested life insurance policy.

As to retirement accounts, not all of the whole vested amount will be considered, e.g. 70% of 401(k), IRA and other related accounts’ vested value.

Stock units become unacceptable if they are from a company or corporation not listed with the SEC. This applies to stock options and restricted stock units that have not vested.

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You can’t also use personal unsecured loans or proceeds from cash-out refinance for your reserve funds.

This is why lenders verify assets for reserve requirements (although this asset verification applies to down payment and closing costs) to ensure that the borrower has funds safely tucked in and that these funds are not illegally sourced or additionally burdensome to the borrower.

How Much Do You Need for Your Reserves?

Your minimum reserve requirement rests on a combination of various factors. But a good starting point would be the property type, i.e. its occupancy status and the number of units.

From there, you can look up what each loan type’s reserve requirement is:

  • FHA loans: This loan program does not have a reserve requirement on one-to-two properties. But for borrowers with non-traditional credit or those requiring manual underwriting, one month of reserves is required. On three-to-four unit properties, reserves worth three months of PITI are required.
  • VA loans: Just like FHA loans, these loans for military personnel require (i) no reserves on one-to-two unit properties and (ii) six months’ reserves on three-to-four unit properties. The borrower also pays additional three months of reserves for every rental property he or she owns.
  • USDA loans: Although these government-guaranteed loans don’t really require cash reserves after closing, having two months of reserves can be a compensating factor.
  • Conforming Loans: The reserve requirements for Fannie Mae take into account the transaction type, the property’s number of units, the borrower’s credit score and LTV, and debt-to-income ratio, the type of underwriting (DU or manual). This is an example of Freddie Mac’s reserve requirements matrix.
  • Jumbo Loans: Reserves on those loans can be equal to three months, although they can go higher depending on the size of the loan.

Indeed, buying a home goes beyond closing. There’s your house to take care of after the transaction closes. Despite reserves being a requirement, it’s wise to have funds set aside for your home.

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