Underwriters want to check that you are a responsible borrower who’s financially able to repay the mortgage. They also need to make sure the money you use for your down payment comes from your income and other legal sources. Once they are satisfied that you are honest and straightforward, your home loan officer will be able to approve your mortgage application.
What Documentation Do You Need?
Applying for a mortgage can seem intimidating because of the documents your lenders ask you to provide before they extend a mortgage to you and your family. These essential documents include your income records, such as pay stubs, two government-issued IDs (typically your driver’s license and social security card), and your asset documentation.
The specific asset documentation needed by lenders can vary depending on the type of loan program you opt for. For conventional loans or jumbo loans, two months of your primary bank account statements may suffice. However, for a USDA loan, qualification might require at least two months’ worth of statements for every family member above 18 years of age in your household.
A bank statement is a window into your financial life and plays a crucial role in the mortgage process. Bank statements tell your loan officer how much money you earn, where you spend it, and whether you are being financially responsible with your cash flow. This will determine whether you can get a mortgage loan approved so you can buy a home.
Your recent bank statements show if you can afford the down payment and closing costs, as well as monthly mortgage payments. As they are essential to this, your lenders check bank statements, deposits, and withdrawals for red flags — particularly negative balances resulting from overdrafts or non-sufficient funds fees.
What Are Underwriters Looking for in Your Bank Statements?
Underwriters and loan officers typically check the previous two months’ bank activity in your bank statements. For self-employed mortgage applicants, however, they may go back up to 12-24 months.
You can afford your down payment
Your bank statements will show if you have saved enough money already. Your loan officer will ask for all types of bank statements, including checking and savings accounts.
The money you have saved will determine the amount of mortgage you can afford. If your underwriter requires you to make a 10% down payment, you can apply for a mortgage worth $300,000 only if you have saved $30,000.
Likewise, the money you have saved should cover closing costs, appraisal, and other expenses that come with buying a home.
You can afford your monthly mortgage payments
Whether you are a self-employed company owner or an employed borrower, during the home-buying process your lender will trace and verify your income sources.
Your level of income is fully visible in your bank statements. Mortgage lenders look at bank statements to see how much money you earn and what types of debts you already carry: credit cards, car payments, and student loans increase your debt-to-income ratio. Mortgage lenders require a DTI inferior to 43% to ensure you can make your mortgage loan payments.
Your bank statements show money coming in and out. That’s what will determine the income available to repay your mortgage.
You have some cash reserves
Cash reserves tell underwriters that you can repay your mortgage for a few months even if you don’t have a steady income. They are your emergency fund in case you are temporarily unemployed. The existence of a cash reserve shows responsibility and foresight, which loan officers greatly appreciate.
You haven’t taken on extra debts recently
Taking on extra debt such as personal loans increases your DTI and affects your credit score. Your credit report matters when you are applying for a mortgage. If you decide to buy a car on credit, you will increase your overall level of debt and you might not be able to afford monthly mortgage payments. Mortgage lenders use bank statements to verify your financial situation and ensure your DTI allows you to pay the new home loan’s monthly installments.
The money you have saved comes from a legal source
If you have large deposits aside from your work, you must explain where they came from. For example, USDA and FHA loans consider non-payroll deposits exceeding 1% of the home purchase price or appraised value as large deposits, while conventional, jumbo, and VA loans define large deposits as non-payroll deposits exceeding 50% of your monthly qualifying income.
While these definitions provide a guideline, mortgage lenders may have their own rules regarding large deposits. Your mortgage lender needs to verify that all funds in your account are sourced and seasoned, which means that your funds not only need to be justified, but should also be in your account for some time.
This ensures that you are not paying your down payment with an unofficial loan. In such cases, you may be asked to write letters of explanation and provide sources for some deposits. These handwritten or typed letters of explanation will clarify what happened and how you plan to avoid future occurrences.
Follow through with your plans to rectify these issues, as repeated overdrafts even after implementing a strategy may lead the underwriter to perceive you as a higher risk.
What Underwriters Don’t Want to See in Your Bank Statements
Red flags that signal potential issues with your current debts, rent payments, or spending habits, include overdrafts, unexplained withdrawals, and unusual deposits.
Overdrafts and unpaid debts
An underwriter will get inquisitive if they see numerous overdrafts, unpaid credit card debts, and bounced checks. These are signs that you are not handling your finances responsibly. The loan officer will likely draw the conclusion that you won’t be conscientious with your mortgage payments.
Mortgage underwriters pay close attention to recurring withdrawals on your bank statements and compare them to the debts listed in your loan application. If any withdrawals seem inconsistent with the provided information, they will seek clarification. For example, if there are recurring non-payroll withdrawals, the underwriter might inquire if they are associated with debts or items like child support payments.
In situations where borrowers have informal agreements for child support, a signed letter of explanation from both parties involved may be required. This letter should specify the agreed-upon amount and the duration of the child support payments, along with the child’s birth certificate if age-related terms are mentioned. Such withdrawals affect the debt-to-income ratio and can make a mortgage payment more difficult.
Large deposits on your bank statements can also raise questions from underwriters. Of course, different loan programs have varying definitions of what constitutes a large deposit.
Non-Payroll, one-time-only deposits
Occasionally, you may receive one-time deposits, such as payment for helping a neighbor with a task. In such cases, you should clearly explain the source and nature of the deposit in your letter of explanation. Providing additional details, like a brief contract between you and the payer, can further support your explanation.
Sourcing deposits may seem overwhelming, but it’s a necessary part of the mortgage application process. If you don’t have a direct deposit, you’ll need to supply copies of your paychecks to verify deposits into your bank account. When writing your letter of explanation, you also want to include details like the date and amount of each deposit, providing the underwriter with as much information as possible.
Deposits that don’t appear as payroll or direct deposits, especially those exceeding 1% of the loan amount, must be sourced and explained to the underwriter. Transfers between bank accounts may also require explanations and sourcing, particularly if the transferred amounts exceed certain limits.
It can affect your loan approval if you can’t define the sources of funds for certain deposits, particularly cash deposits without clear origins. Lenders will likely deny your application if you fail to provide a credible source for the required funds. Anti-money laundering laws restrict underwriters from approving funds that lack a transparent source.
Bank Statements Disclose Your Financial State
Your bank statements serve as critical documents in the mortgage approval process. They provide insight into your financial health, real spending habits, and ability to manage debts — all of which influence the lender’s decision regarding your mortgage approval. Lenders need bank statements to proceed with the verification of deposit and withdrawal history required by the loan application process.
Understanding the importance of bank statements and proactively taking the necessary steps to address any red flags can greatly improve your chances of securing the mortgage loan you need to make your dream house a reality.
If you need help preparing your documents, contact a mortgage loan officer 7 days a week or connect with us through our social media channels!