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.