To approve your request for a mortgage, mortgage lenders look at your bank statements. They are used to verify certain things such as down payments, closing costs, and future loan payments. Your chances of getting your mortgage request approved increase exponentially if your bank statements don’t show anything suspicious or questionable.
With the pandemic and millions of people losing their jobs. The rate of fraud has gone up exponentially. To mitigate the risk of loan fraud, lenders verify documents thoroughly. There are few major things that act as a red flag for mortgage lenders and can cause your mortgage application to not pass through. As a borrower, your financial situation should be healthy before applying for a loan.
How Far Back The Lenders Look for Bank Statements?
To check if a person is worthy enough to provide a mortgage to, lenders usually look at least 2 months of recent bank statements. You’ll need to provide statements for any account you are using to qualify for the loan. Two months of bank statements are the industry standard as any credit accounts older than 2 months will be visible on your credit report.
One common exception of going past 2 months of bank statements is when a self-employed person applies for a mortgage. They don’t exactly have tax returns so the mortgage lenders ask for bank details going back to 12-24 months. Although tax returns aren’t a widely used method for verification.
What do Underwriters Look for in Bank Statements
The person who evaluates your bank statements and decides whether or not to approve your mortgage is known as an underwriter. An underwriter will look out for four main things on your bank statements.
- If you have enough cash saved up for the down payment and closing costs.
- The source of your down payment, which must be acceptable under the lender’s guidelines.
- Enough cash flow or savings to make monthly mortgage payments.
- Check for “Reserves” which are extra funds available in case of an emergency.
An underwriter basically just wants to see how much funds are available in your bank accounts and if they are borrowed from someone else. The exception is if you have proper documentation for the money you have borrowed from someone.
In other words, any funds can be used to qualify for a mortgage be it sourced or seasoned. Sourced funds mean it is clear where the money actually came from, and any unusual deposits have the ideal documentation for them.
Seasoned funds refer to an amount that has been in your account for at least 60 days. So the funds should show up on the two months bank statements you’re asked to during approval. Bank statements also show underwriters that you haven’t opened up any credit accounts or created a new debt before applying for the loan.
Do Lenders Verify Bank Statements Before Closing?
Once the lenders have gone through your bank statements and approved the mortgage application, it is less than likely that they’ll check your bank statements again before closing the process. Although, there are some things that lenders will recheck before closing which includes:
- Credit score
- Credit report
- Employment and income
You should avoid financing any large purchases or opening new credit lines before getting your mortgage approved. Getting into any new debts before getting your mortgage approved can affect your credit score and your debt-to-income ratio, it can also affect your loan approval and interest rate.
Also, if anything happens with your income or employment before the closing of the loan. You need to let your lender know about it immediately so they can decide how it will impact your loan approval. As soon as you inform the mortgage lender about it, the faster you will understand how you can move along with the process.
3 Things Mortgage Lenders Don’t Want To See on Bank Statements
You may want to go through your bank statements with a keen eye before handing them to the mortgage lender. If your lenders end up finding any red flags, it may even cause you to lose your mortgage approval.
Mortgage underwriters are trained to find the suspicious source of funds, undisclosed debts, and financial mismanagement while examining your bank statements. Here are the three main things to look for that might end up as a red flag for lenders.
1. Bounced Checks
If your bank account is full of overdrafts or Non-Sufficient funds charges, underwriters are much likely to mark them as a red flag and it will show them that you aren’t exactly great at managing your finances.
A mortgage rule-making agency says that additional scrutiny is needed when bank statements include NSF fees.
2. Large, Undocumented Deposits
Huge or irregular bank deposits might indicate that your down payments, required reserves, or closing costs all come from an unacceptable source. The fund may be borrowed, you may have taken a cash advance on your credit card, which may not show up on the credit report.
A large deposit can also be indicated as an “illegal” source of funds. If you can’t provide proper documentation for the source of documents, it can be a problem. The source of deposit should be under the program guidelines, if not lenders can disregard your loan application.
If verified funds aren’t enough for you to qualify for a loan. You’ll need to save a some cash from an acceptable source before applying again. If you want, you can borrow some money for loan downpayment. All you have to do is to provide documentation from where the money came from. Acceptable sources to borrow funds for a down payment can be:
- A down payment gift from a family member or other relation.
- Down payment and/or closing cost funds from a down payment assistance program.
Let’s say you received a large chunk of money in your account recently. If it wasn’t from above mentioned sources then you may want to wait for 2 months before applying again.
3. Regular Payments, Irregular Activities
If you have a monthly payment that does not correspond to a credit account shown on your application. Typically, your credit report will include your credit card, auto loans, student loans, and other debt accounts although some creditors don’t report to the credit bureau. Let’s say that you have a private, personal, or business loan from a person instead of a financial institution, those types of debts may not even show up on your credit report. If you have a $300 automatic payment every month, it may act as red flag for underwriters.
DIRO’s Technology for Streamlining Bank Statement Verification
Lenders can go a long way to verify bank statements and to find out if there is any suspicious activity that can harm the bank in the long run. While this whole process mitigates the risk of loan fraud, it also takes up a lot of time and resources. Banks can streamline the process of bank statement verification by utilizing new technologies.
DIRO’s award-winning document verification technology can improve the overall bank statement verification process for mortgage approval. DIRO captures original web documents from any third-party online source. Using DIRO’s online document verification technology, you can easily verify bank statements and look out for anomalies. The technology even offers a strong proof of authentication which can save banks and other financial institutions from future losses.
