When you are trying to buy a home or get a home equity line of credit, a lot of paperwork is involved, from credit reports to legal contracts.
In particular, mortgage lenders require a lot of documentation to put together a full financial picture of potential borrowers. This financial assessment involves reviewing bank statements from all accounts owned by the borrower and any co-borrowers.
Therefore, part of the home buying process must include a self-assessment of borrowers’ bank statements, and that starts with understanding what mortgage lenders look for when reviewing them.
It’s important to become familiarized with some of the basics, including why mortgage lenders need bank statements, how many they need, and what red flags could affect a borrower’s ability to get the loan they need.
Why Do You Need Bank Statements for a Mortgage?
Those who have already begun the process of applying for a mortgage are probably aware that lenders require a variety of financial documents, such as W-2s, pay stubs, tax returns, and credit reports.
However, they may be wondering why bank statements are also needed for a mortgage. Simply put, reviewing bank statements is part of the due diligence process for lenders.
Bank statements tell a different story than other financial documents — namely, it shows a bigger picture of money that goes in and out each month.
It can also show the amount of savings that is readily available. In the mortgage business, lenders refer to these concepts as money that is “sourced and seasoned.” This simply means that they want to understand where money is coming from (the “source”) and that it is consistently available (or “seasoned”). Bank statements will reveal these details.
How Many Months of Bank Statements do You Need for a Mortgage?
Most mortgage lenders require two months (60 days) of bank statements because any borrowing or other activity shows up on a credit report within 60 days.
One of the specific items that lenders look for in these statements is evidence of a personal loan. They want to be sure that you have enough money to cover the down payment and closing costs without the need for additional funding.
Bank Statement Red Flags for Mortgage Lenders
First-time homebuyers are often especially concerned about the risk of denial of a mortgage loan. This is understandable, as mortgage lenders do look at every aspect of financial history to determine whether or not to issue the loan. However, lenders issue millions of home loans each year to a variety of borrowers from all types of different financial backgrounds.
In fact, for many potential borrowers, it’s not what they do, but what they don’t do that really matters in the eyes of a mortgage lender.
To that end, borrowers should consider the three major red flags that that mortgage lenders will look for when reviewing a loan application.
Bounced Checks
Overdraft fees are an expensive and inconvenient occurrence that is common among those who are living from paycheck to paycheck. When evaluating bank statements for a mortgage application, one item on lenders’ minds is the amount and frequency of overdrafts, also known as NSFs (non-sufficient funds) or “bounced checks.” This is a sign that borrowers are living beyond their means or don’t have the ability to properly manage their finances.
Undocumented Large Deposits
One of the goals of the mortgage application process is for lenders to review the source and legality of all funds provided by the borrower.
Certain large deposits, which is usually defined as more than 50% of one’s qualifying monthly income, are an automatic red flag. This could be an illegal gift, for example, from a real estate agent or home seller who would benefit from the transaction or a personal loan that may impact the buyer’s ability to pay the mortgage.
Large, undocumented deposits can also be a sign of illegal activity.
A good rule of thumb in the case of any large deposit that you may receive in the months leading up to your mortgage loan evaluation is to keep careful records and disclose them to the lender upfront.
Although you are allowed to use gifts from family or other sources to make the down payment or pay for closing costs, you should make sure that this intention is clear prior to the lender’s evaluation of your bank statements.
Other Undisclosed or Irregular Activities
The final item many mortgage lenders look for is payments or other activity in your bank account that doesn’t coincide with known activities.
Specifically, this refers to regular payments that don’t appear on credit reports, such as repayment of a personal loan from a family member or a friend.
Remember, the main purpose of evaluating bank statements is to make sure borrowers have enough money available every month to make their mortgage payments. As long as these other payments are disclosed during the initial loan application, it won’t count against borrowers.
Get Started on Your Mortgage Loan Journey Today
The mortgage application process is stressful and hard to understand, particularly if it’s your first time. That’s why it is so important to partner with a lender who has your best interests in mind.
At HRCCU, our mortgage professionals work with individuals at all phases of the home buying journey, from first-time buyers to seasoned pros who want to refinance or take out a home equity loan.
Contact us today to set up a consultation appointment with an expert who will take you through the step-by-step mortgage evaluation process to ensure that you are ready — bank statements and all — to put your best financial foot forward.
