You would think bank statements would be a pretty straightforward condition to satisfy on your mortgage. It’s not. It could actually be one of the most complicated. Knowing what underwriters look for and what sends out a red flag can help you get approved.
We’ll take a close look at what goes on in underwriting and how you can make sure your statements pass with flying colors.
Don’t Just Look at Today
Underwriters are going to look at more than this month’s bank statement. At the very least, they’ll want the last 2 months’ worth of statements. If you are self-employed or work on commission, they’ll probably want at least the last 12 months’ of bank statements.
When you are preparing yourself for a mortgage, make sure you pay close attention to your bank accounts. Pay attention to what goes in and comes out. You can bet that underwriters will be looking at every transaction. If you are self-employed or work on commission, they’re going to look at them with a microscope, so be extra careful.
Red Flags on Bank Statements
There are some common red flags every underwriter will look for on your bank statements. The largest is irregular deposits. If the underwriter can’t source the deposit with your income, they will inquire about it. The best way around it is to do the following:
- Source the origin of the deposit with a paper trail (if you sell an asset keep the Bill of Sale, for example)
- Keep the copy of the deposit ticket when you put the money in your account
This paper trail will help deflect any red flags regarding irregular deposits.
Cash deposits are often a red flag too. Unfortunately, you can’t source them because there isn’t a paper trail. If you do have cash deposits, the lender may exclude them from your total assets. If you counted that money towards your down payment or reserves, you might come up short.
Overdrafts are another large red flag. Just like a low credit score, they imply financial irresponsibility. If you have a rational reason for the overdraft, you can write a Letter of Explanation to the lender. You should also have proof of the reason. For example, if someone hacked into your account, you aren’t responsible for the overdraft. If you have proof of this occurrence, the lender might be able to overlook this issue.
Sourcing Income on Bank Statements
A large reason for collecting bank statements is to verify your income. Even though you probably provided bank statements and even a Verification of Employment, it’s just another layer. Consider it a way for the lender to protect themselves.
Lenders use bank account statements as a way to verify that you receive the income you say you make. It’s not enough to show your paystubs. Lenders want to see the proof of receipt. This way they see where you put the money and how you use it.
If you have irregular income, such as commission, bonus, or self-employment income, bank account statements help prove the income. Lenders use your tax returns when you make irregular income. But this isn’t proof of receipt. They want to see the physical receipt of the money and where it goes. This is especially important when you own your own business. The lender needs to make sure your business and personal accounts don’t overlap otherwise you could count the same money twice.
Watch Out For Withdrawals
Lenders pay close attention to the withdrawals you make from your bank account too. Regular withdrawals to pay bills and such aren’t an issue. But, if you have a large withdrawal that the lender can’t tie to anything, they may ask about it.
Be ready with an explanation and possible proof of the withdrawal. The lender just wants to make sure you don’t have another debt out there that they aren’t aware of. If there is a debt, they’ll have to figure the payment into your debt ratio. This could alter your loan approval.
What Do Lenders Need?
If your lender asks you for your bank statements, you’ll need to provide the full statement. This means all pages, even the blank ones. You can tell how many pages the lender expects by looking at the top of your statement. It will say page 1 of “however many total pages.” The lender will expect to see each of those pages.
Along with all of the pages, lenders need proof that the statements belong to you. The documents should clearly show your name, address, and account number. If there is another person’s name on the account, you must verify your relationship. If the person you share the account with is not on your loan, you can’t use all of the assets. The lender will likely divide the account’s value up amongst the total number of people listed on the account.
In order for lenders to approve your bank statement documents, you should get copies that are clear and legible. Make sure that all pages are present and that there aren’t any odd deposits or withdrawals reporting. If there are, get ready to explain the issue.
The more upfront you are with your lender right away, the easier the process will go. Bank account statements are very important if you need them to prove your income or are putting money down on a home. In some cases, refinance loans even need statements because of the need to provide proof of reserves.
It’s good practice to keep a copy of your latest bank statements in the event you need them for mortgage processing. Preparing your accounts ahead of time for mortgage approval will help you have the easiest time securing a mortgage.