There are many ways to prepare to buy a home, but a major one is to ensure your finances are completely sound. A lender is going to request many financial documents, one of which will be your bank statements. While it might seem like an insignificant request compared to your taxes or paystubs, your bank statements are vital to get your loan approved. So, what do mortgage lenders review on bank statements?
The simple explanation is that a mortgage lender needs to ensure you have sufficient funds to cover the down payment, closing costs, and some might even want to see if you have enough reserves to cover the first few mortgage payments. It is paramount these funds belong to you and they have been in your account for a while. Underwriters are thoroughly trained to pinpoint all unacceptable sources of funds, hidden debts and other red flags by analyzing your bank statements. Before you begin the homebuying process, it is best to ensure you don’t have anything questionable on your statements that will raise a red flag.
Here are 3 of the most common red flags:
If you or an automatic payment have withdrawn funds from your account that you did not have, your bank statement will show “NSF” or non-sufficient funds. Having multiple NSF’s on your statements will show a lender that you are not financially responsible, making you a risky borrower. This could lead to your application being declined. The best option is to wait to apply until at least 2 months of recent bank statements are NSF free. If you don’t want to wait, be prepared to explain to your lender why your statement shows NSF, especially if it was not completely your fault. You might have forgotten to transfer funds from your savings to your checking, or maybe there was a problem with your paycheck that was out of your control. Whatever your reason, your lender will need to know.
It is critical that all the money in your account is completely your own. This means that any additional deposits (not your income), borrowed money, a cash advance, or gifted funds can all raise red flags. Again, if you are flagged, your lender will contact you for explanations of where the funds came from. Borrowing funds to help you with a down payment is fine, but you need to disclose it. If you can’t prove the funds are acceptable, they will be disregarded and won’t be used to help you qualify for the loan. If you know you are going to be receiving a large deposit, let the funds “season” for a couple months, otherwise it will not be considered yours. For example, if you plan on depositing all the money you’ve been storing under your mattress, do so months before you plan on applying for a loan rather than right before.
Credit reports will account for all your credit cards, student loans, auto loans, and other debt accounts. However, some creditors don’t report if you have a personal or a business loan. If your account shows you are receiving regular payments that are not your income or if there are any irregular activities, these can cause a red flag. No matter what it may be, having a monthly automatic payment of any amount will alert a lender and can cause issues. It is best to disclose all sources of funds or any unusual activity to your lender upfront.
Applying for a loan is not something to take lightly. Your lender is going to inspect your finances to ensure you have the money you say you do, and that the money is really yours. It is best to analyze your finances from the perspective of a lender a few months before applying for a loan to ensure you reduce the risk of having any red flags. This will also give you time to gather the documentation or explanations you might need in case you think something will catch the lender’s eye. Keep it simple both before and during the application process by not adding or taking out any unnecessary funds, and to help ensure you have a smooth experience.
We recently discussed the fourth step in the home buying process: applying for the loan. Once you apply for a home loan, your Mortgage Loan Originator will submit all of your documentation to Processing, and from there, your loan will be sent to Underwriting. These are crucial steps, and it is important to understand some of the factors that go into getting your home loan approved.
Processing Once you have submitted all of the required documentation for your loan application, your Loan Originator will submit everything to Processing. The Processor puts all of the documentation together for Underwriting, and works closely with the Loan Originator to ensure a smooth process. They will order a title search to make sure that the seller has legal rights to the property, and schedule an appraisal to determine the value of the property. Based on information received, the Processor may reach out to the borrower for any additional documentation needed. Once all of this has been completed, the Processor will send the application to Underwriting.
Underwriting In the underwriting process, the lender determines the degree of risk involved with lending the consumer money. Here are the “Four C’s” that the Underwriter will evaluate:
Credit: Your credit score gives the lender an idea of how well you manage debt. The Underwriter will pull a credit report based on information from the three major credit bureaus: Equifax, Transunion, and Experian. They will analyze your credit history, including your credit score, payment history, number of open accounts, and the balances on those accounts
Capacity: Capacity is a consumer’s ability to make payments on the loan. The Underwriter will evaluate your debt-to-income ratio, which is your monthly debt divided by your gross monthly income. The lower your debt-to-income ratio, the more likely it is that you will be able to make mortgage payments.
Collateral: Collateral is an item of value that is pledged for repayment of a loan; in this case, the house you are buying. The Underwriter will compare the value of the house based on the appraisal, and comparable properties in the area, to the cost at which the house is being purchased.
Capital: Capital refers to your income and any verifiable monetary assets you may have, such as retirement funds, checking and savings accounts, etc.
Once the Underwriter has approved all applicable documentation, and determines that the loan is a good fit, a clear-to-close (CTC) will be issued, allowing the loan to move into the final stage of the process: closing on your new home.