Getting a mortgage is a big step in life, and you can make it go more smoothly if you know how complicated the process is. One crucial aspect of mortgage approval is the verification of your bank statements. These statements are carefully examined by lenders in order to evaluate your financial situation and determine your capacity to repay the loan.
This guide delves into the intricacies of how mortgage lenders verify bank statements, providing valuable insights to help you prepare for this critical step.
Why Lenders Verify Bank Statements
Mortgage lenders verify bank statements for several key reasons:
- Income Verification: Lenders need to verify your income stability and consistency to ensure you can afford the monthly mortgage payments. They examine your bank statements for regular deposits, paychecks, or other income sources.
- Expense Analysis: Lenders analyze your spending habits and recurring expenses to gauge your financial responsibility. They look for consistent bill payments, existing debts, and overall financial commitments.
- Account Stability: Lenders prefer stable financial histories. Frequent overdrafts, large unexplained transfers, or erratic account behavior can raise concerns about your financial stability.
- Risk Assessment: By reviewing bank statements, lenders evaluate the risk associated with lending you money. They assess if your financial situation aligns with the loan amount and terms requested.
- Fraud Detection: Bank statements help detect potential fraudulent activity or inconsistencies in financial records. This is crucial for ensuring the borrower’s credibility.
What Lenders Look for on Bank Statements
Mortgage lenders scrutinize your bank statements for specific details, including:
- Down Payment and Closing Costs: Lenders verify that you have sufficient funds in your bank accounts to cover the down payment and closing costs.
- Source of Down Payment: Lenders ensure that the source of your down payment aligns with their guidelines. Acceptable sources include personal savings, gifts from family members, or down payment assistance programs.
- Cash Flow and Savings: Lenders assess your ability to make monthly mortgage payments by examining your cash flow and savings. They look for consistent income deposits and sufficient savings to cover emergencies.
- Cash Reserves: Lenders prefer borrowers with cash reserves, which are extra funds available in case of unexpected expenses.
How Lenders Verify Bank Statements
Mortgage lenders typically verify bank statements in one of two ways:
- Directly from the Borrower: The borrower provides the lender with copies of their bank statements. The lender then reviews the statements for the required information.
- Through a Verification of Deposit (VOD): The lender requests the borrower’s bank to complete a VOD form, which verifies the account owner, current balance, and other relevant details.
Red Flags for Lenders
Mortgage lenders watch out for specific red flags on bank statements, which can raise concerns about your financial stability and trustworthiness These red flags include:
- Bounced Checks or Non-Sufficient Funds (NSF) Fees: Frequent overdrafts or NSF fees indicate poor financial management and can negatively impact your loan approval chances.
- Large, Undocumented Deposits: Large, unexplained deposits can raise suspicion about the source of funds and may require further explanation.
- Regular Payments to Individuals or Non-Disclosed Credit Accounts: Payments to individuals or non-disclosed credit accounts can indicate hidden debts or financial obligations.
How to Prepare for Bank Statement Verification
To prepare for bank statement verification, consider the following tips:
- Review Your Bank Statements: Before submitting your bank statements to the lender, review them carefully for any red flags. Address any inconsistencies or suspicious activity proactively.
- Explain Large Deposits: If you have large, undocumented deposits, be prepared to provide documentation explaining the source of the funds.
- Avoid Opening New Credit Accounts: Avoid opening new credit accounts or taking on new debt before and during the mortgage application process.
- Maintain Stable Finances: Strive to maintain a stable financial history with consistent income deposits, regular bill payments, and minimal overdrafts.
Frequently Asked Questions
How many months of bank statements do mortgage lenders need?
Mortgage lenders typically require two months’ worth of bank statements. However, they may request more statements if you have a complex financial history or are self-employed.
Do mortgage lenders check bank statements before closing?
Yes, shortly before closing, mortgage lenders usually review bank statements to make sure no major changes have occurred to the borrower’s finances since the original approval.
What happens if my bank statements have red flags?
If your bank statements have red flags, the lender may request explanations or documentation to address the concerns. In some cases, red flags can lead to loan denial.
How can I improve my chances of mortgage approval?
To improve your chances of mortgage approval, focus on maintaining a stable financial history, building a good credit score, and saving for a down payment.
By understanding how mortgage lenders verify bank statements and preparing accordingly, you can increase your chances of securing a mortgage and achieving your homeownership goals.
Verifying bank statements is an essential part of the mortgage approval process. By understanding what lenders look for and how they verify this information, you can prepare effectively and increase your chances of a successful mortgage application.
What do underwriters look for on your bank statements?
Your bank statements will be examined by the underwriter, who assesses and approves mortgage applications, for four main reasons:
- Sufficient funds in reserve for the down payment and closing charges
- The source of your down payment, which has to meet the requirements set forth by the lender
- Enough cash flow or savings to make monthly mortgage payments
- Extra money set aside for emergencies is known as a cash reserve.
Generally speaking, an underwriter wants to make sure that the money in your bank accounts is yours and wasn’t borrowed (unless it was through a gift of a properly documented down payment).
In other words, any funds used to qualify for the mortgage need to be “sourced and seasoned.”
- “Sourced” refers to a situation in which the source of the funds is evident and any unexpected deposits are documented. Again, large deposits still may require an explanation.
- Usually, “SEASONED” indicates that the funds have been in your account for a minimum of sixty days. The money ought to appear on the two months’ worth of bank statements that you have to submit.
Bank statements additionally demonstrate to underwriters that prior to obtaining the mortgage, you had not opened any credit accounts or taken on any new debt.
3 things mortgage lenders don’t want to see on bank statements
Before sending your bank statements to your mortgage company, you might want to examine them through the lens of a mortgage underwriter.
That’s because the lender looks for red flags that, if found, can require lengthy explanations.
Red flags for mortgage underwriters include the following:
- Bounced checks or non-sufficient funds fees
- Large deposits without a clearly documented source
- Monthly payments to an individual or non-disclosed credit account
Mortgage underwriters are trained to look for unethical funding sources, unreported debts, and poor financial management when reviewing your bank statements.
The following three things on your bank statements could raise an alarm for a financial institution:
Underwriters are likely to conclude that you are not managing your finances well if your checking account displays a number of overdrafts or NSF (non-sufficient funds) charges.
Mortgage rule-making agency Freddie Mac says that additional scrutiny is required when bank statements include NSF fees.
Even if a computerized system has previously approved a mortgage borrower with a non-sufficient fund (NSF), FHA loans mandate lenders to manually reapprove them.