Your credit reports contain a lot of information, but some items are more important than others.
What factors do lenders take into account when they review your credit report? This is an easy question with a difficult answer because there are no common criteria that all lenders use to evaluate potential borrowers. It can depend on both the lender and the type of loan.
Of course, there are some items that will increase or decrease your odds of approval just about everywhere. Examining the components of your FICO score—the most popular credit scoring model—is a smart place to start. FICO scores range from 300 and 850, with anything 670 or above considered good or better. It will probably be difficult for you to borrow money at favorable interest rates, if at all, if your score is significantly lower than that.
You will be required to submit a lengthy mortgage application that includes information about your income, assets, and debts. One question you might have is whether mortgage lenders check closed accounts. The answer is yes, they do.
What Closed Accounts Do Mortgage Lenders Check?
Mortgage lenders will typically review your bank statements for the past two to three months. They will look at all of the accounts that you have open, including checking and savings accounts as well as any closed accounts. This includes accounts that you have closed yourself as well as accounts that have been closed by the bank.
Why Do Mortgage Lenders Check Closed Accounts?
Mortgage lenders check closed accounts for a few reasons. First, they want to make sure that you have a history of managing your finances responsibly. If you have a history of closing accounts due to overdrafts or other negative activity, it could be a red flag to the lender.
Second, mortgage lenders want to assess your overall financial picture. By looking at your closed accounts, they can get a better sense of your income and expenses. This information can help them determine how much you can afford to borrow and whether you are a good candidate for a mortgage.
How Can Closed Accounts Affect Your Mortgage Application?
Closed accounts typically won’t have a big effect on your mortgage application. However, there are a few exceptions.
- If you have a history of closing accounts due to overdrafts or other negative activity, it could make it more difficult to get approved for a mortgage.
- If you have closed a large number of accounts in a short period of time, it could raise red flags for the lender.
- If you have closed an account that was used to pay for your mortgage, it could affect your ability to qualify for a new mortgage.
What Can You Do If You Have Closed Accounts?
There are a few things you can do to increase your chances of being granted a mortgage if you have closed accounts.
- Be prepared to explain why you closed the accounts. If you closed the accounts due to negative activity, be honest with the lender about what happened.
- Provide documentation to support your explanation. This could include bank statements or letters from the bank explaining why the accounts were closed.
- Focus on your positive financial history. Highlight your stable income, low debt-to-income ratio, and good credit score.
Mortgage lenders do check closed accounts, but in most cases, they will not have a significant impact on your mortgage application. However, if you have a history of closing accounts due to negative activity, it is important to be prepared to explain why you closed the accounts and provide documentation to support your explanation. By focusing on your positive financial history, you can increase your chances of getting approved for a mortgage.
Your Amounts Owed
Large amounts of outstanding debt are another significant concern to lenders. It may seem counterintuitive, but having less debt increases your chances of obtaining credit. The theory goes that someone who has a lot of debt now could find it harder to pay it back.
What constitutes a large amount will vary from individual to individual. Lenders use various metrics, such as your credit utilization ratio. That represents the percentage of your available credit that you currently owe in debt. Generally speaking, the lower that percentage, the better. Outstanding debt accounts for 30% of your FICO score.
FICOs principal competitor, VantageScore, looks at a similar list of items but assigns them slightly different weights.
Your New Accounts
Applicants who have opened a large number of new credit accounts in a short period of time are frowned upon by lenders. They will wonder why you require so much credit if they see that in your credit report. They will also have questions about your ability to repay should you suddenly max out all those accounts. New credit makes up 10% of your FICO score.
Thus, in order to preserve a high credit score, consider your options carefully before opening an account just to receive a free travel mug or umbrella, or even better, receive that alluring 10% off your purchase when you register for a store account.
Signing up for several new credit cards within a short period of time may hurt your credit score.
Warning Mortgage Lenders, Beware the Closed Account with a Balance. Credit Score Tips
FAQ
Can closed accounts stop you from buying a house?
Do creditors look at closed accounts?
Do lenders check your bank account the day of closing?
Do lenders check your credit after closing?
Will my loan officer check my bank statements before closing?
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. Verify your home buying eligibility. Start here
Do lenders have to sign off on bank statements?
Before the lender fund the loan, the underwriter will have to sign off on your bank statements. How Many Months of Bank Statements Do Mortgage Lenders Require? Lenders typically request two months of statements for each of your bank, brokerage, and investment accounts in order to qualify for a mortgage.
How do I Close on a new home mortgage?
One of the final and most important steps toward closing on your new home mortgage is to produce bank statements showing enough money in your account to cover your down payment, closing costs, and reserves if required. When you’re buying a new home and approaching the finish line, emotions are high and timing is tight. Need a Second Opinion?
Does a mortgage loan show up on a bank statement?
While mortgage lenders look for specific information on bank statements to approve your loan, there are also some things they don’t want to see or you risk the mortgage loan being denied. Some of the things you should make sure are not part of your finances (and thus doesn’t show up on your bank statement) include: