A Guide To Bank Statements For Your Mortgage

Lenders consider a number of mortgage qualifications during the loan application process, from the type of property you want to buy to your credit score. Your lender will also ask you for a few different financial documents when you apply for a mortgage – including your bank statements.

So, what does your bank statement tell your mortgage lender, besides how much you spend per month? Let’s look at everything your lender might glean from the information on your bank statement.

Bank statements are monthly or quarterly financial documents that summarize how much money you have in your account as well as your banking activity. Your statements can be sent to you through the mail, electronically or both.

Banks issue statements to help you keep track of your money and report inaccuracies faster. If you have a checking and savings account, activity from both of your accounts will probably be included on a single statement. Your bank statement will also show you a list of all activities throughout a particular period, including deposits and withdrawals.

• Deposits: Money that’s been put into your account is a deposit. Direct deposits, cashed checks and wire transfers may make up the bulk of your deposits. Your bank will also deposit money into your account as you earn interest.
• Withdrawals: Any money that’s been transferred out of your account is a withdrawal. For example, whenever you make a purchase, use an ATM or send a transfer, your bank records a withdrawal on your account.

Whether you’re self-employed or you’re an employee at a company, your mortgage lender will need to verify your income as part of the mortgage process.

They Confirm You’re Able To Make Your Mortgage Payments

Your lender typically needs to verify your income to ensure that you have enough money coming in to make your monthly payments. They also check your account balance to confirm that you have enough money in your account to cover a down payment.

They Show You Have Reserve Funds Available

Your lender may also want to see that you have at least a few months’ worth of mortgage payments in reserve funds. That’s so they can be sure you’ll be able to make your payments if you suffer a financial setback, like a job loss. They’ll likely check all of your bank accounts during this process.

They Prove You Can Cover Your Closing Costs

Finally, your lender uses your bank statements to see whether you have enough money in your account to cover closing costs. Closing costs typically range between 3% – 6% of the total cost of your loan. Your mortgage company will also look at your liquid cash to make sure you didn’t forget to set aside money to finalize your loan.

They Prove That Your Assets Are ‘Sourced And Seasoned’

Your lender is also checking your bank statements to be sure that your assets are “sourced and seasoned.” “Sourced” means that the lender knows where your money is coming from. “Seasoned” means that all funds have been in your account for a while – they weren’t just dropped there suddenly, or if they were, they come from an acceptable source.

Both sourcing and seasoning help prevent fraud and money laundering and also assures your lender that you aren’t using a loan for your down payment.

Lenders use a process called underwriting to verify your income. Underwriters conduct research and assess the level of risk you pose before a lender will assume your loan. Once underwriting is complete, your lender will tell you whether you qualify for a home loan.

Here are a few red flags that underwriters look for when they check your bank statements during the loan approval process.

Unstable Income

Lenders need to know that you have enough money coming in to make your mortgage payments on time. Underwriters look for regular sources of income, which could include paychecks, royalties and court-ordered payments such as alimony.

If you’re a self-employed borrower, you may find the normal mortgage application process difficult because your earnings are unpredictable or seasonal. Offering your bank statements to show you can maintain a regular balance sufficient to pay your bills can be crucial to getting approved.

Explaining Changes In Income

If your income has changed drastically in the last 2 months, your lender will want to know why. It’s a good idea to have an explanation available in writing just in case they contact you.

For example, an offer letter from a new job that lists your start date would qualify. If you’re self-employed, your lender may ask to see more than 2 months’ worth of bank statements in order to verify your income.

Low Savings Account Balances

If you lose your job or get an unexpected medical bill, will you still be able to afford your mortgage payments? Lenders sometimes want to know that you have more than enough money in savings to cover your home loan.

Each lender has its own standards for how much you should have in savings, but they’ll often want to see at least a few months’ worth of payments in your account. They’ll also want to see that you have assets sufficient for the down payment and closing costs without help.

Large Influx Of Cash

A large, sudden deposit of cash into your account is a major red flag for lenders. It might signal to a lender that you’ve taken out a loan for your down payment that isn’t showing up on your credit report.

The point of a down payment is to start your mortgage with equity and to make your monthly payments as affordable as possible. This is why using a loan for your down payment defeats the purpose of the payment itself and starts you off with additional debt that could hurt your finances in the future.

Documenting Large Cash Deposits

Sometimes, there’s an acceptable reason for a sudden increase in savings. You may have started a new job with a sign-on bonus or received a monetary gift from a family member. Make sure you have documentation that shows exactly where the money came from before you submit your statements.

For instance, let’s assume your parents gave you a lump sum of money as a wedding gift toward your home purchase. You may need to ask your parents for a copy of the transfer slip or their bank account statement as proof of where their funds came from, as well as a gift letter stating that it doesn’t need to be repaid.

Overdrafts

Overdrafts occur when you spend or withdraw more money than what’s in your account. Most banks charge overdraft fees – and underwriters certainly look for these. Though everyone can make a mistake or two, regular overdrafts are a major red flag for mortgage lenders.

Regular overdrafts on your account might signify that you overestimate how much money you have. It can also show that you’re prone to borrowing more than you can afford to pay back. Be ready to explain any overdraft charges on your account. They may disqualify you from certain mortgage types.

You’ll usually need to provide at least 2 months’ worth of bank statements. Lenders ask for more than one monthly statement because they want to be sure you haven’t taken out a loan or borrowed money from someone to be able to qualify for your home loan.

Two is typically the recommended number because any loans you take out beyond a 2-month timespan will have already shown up on your credit report.

If you’re self-employed, your lender will likely want to review your bank statements over a longer period to analyze your cash flow. They’ll also want to see proof that you keep your business and personal accounts separate. They’ll want to see your business and personal statements.

Bank Statement Loans For The Self-Employed

There’s a specific type of mortgage to help self-employed borrowers get a mortgage without having to provide tax returns, W-2s and paystubs. These are what’s known as bank statement mortgage loans.

Sometimes called a self-employed mortgage, these loans require lenders to look at your bank statements only to determine if you meet their qualifications for mortgage approval. As part of this process, you’ll also need to provide documentation to verify your business, such as a business license or a Doing Business As (DBA).

Still have questions about the role that bank statements play in getting a mortgage? Here are some frequently asked questions that may provide some additional clarification.

How do I find my bank statements?

It’s easy to find your bank statements through your financial institution’s website. Simply sign in and follow the instructions. You can also request a paper copy of your bank statement by calling your bank and speaking to one of their customer service representatives.

What do mortgage lenders use bank statements for?

Simply put, mortgage lenders use bank statements to verify your income and cash reserves to ensure you can repay your mortgage loan and cover your down payment and closing costs. Lenders also use your bank statements to verify where your money is coming from to ensure that it’s yours, rather than an additional loan that would need to be repaid.

How far back do mortgage lenders look at bank statements?

During the mortgage loan application process, lenders will usually want to see 2 to 3 months’ worth of checking and savings account statements. They will review these statements to confirm your income and expense history and ensure you’ll be able to make your mortgage payments.

Can I qualify for a mortgage with bank statements only?

If you’re self-employed and don’t have a W-2 to provide your lender, you may qualify for a type of mortgage called a bank statement loan. Your lender will verify your bank statements and additional documents relating to your business to determine if you qualify for a mortgage.

What other documentation will I need to provide when applying for a mortgage?

Bank statements aren’t the only documents you’ll need to provide during the mortgage application process. If you’re on your company’s payroll, you’ll likely need to provide your recent pay stubs and W-2s. If you’re self-employed, you’ll need to submit your tax returns. Other items your lender will likely request include personal identification, your social security card, investment account statements, and your list of monthly debts.

A bank statement is a monthly or quarterly document that lists all your banking activity. In addition to other documentation, lenders evaluate your bank statements to ensure you’re a reliable candidate for repaying your mortgage and to verify your sources of income.

Ready to get your journey to homeownership started? Start your mortgage application now!