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. But what does your bank statement tell your mortgage lender, besides how much you spend per month? Read on to learn everything your lender might glean from the numbers on your bank statement.
What Is A Bank Statement?
Bank statements are monthly or quarterly financial documents that summarize 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. Let’s say 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 be able to summarize how much money you have in your account and will also show you a list of all activity throughout a particular period, including deposits and withdrawals.
Deposits refer to money that’s been put into your account. Direct deposits, checks cashed 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 indicate any money that’s been transferred out of your account. For example, whenever you make a purchase, use an ATM or send a transfer, your bank records a withdrawal on your account.
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Why Do Mortgage Lenders Need Bank Statements?
If you’re on your company’s payroll, you’ll probably need to provide your lender with recent pay stubs and W-2s. If you’re self-employed, you’ll need to submit your tax returns as well as any other documents the lender requests.
So, if they already have all of that information, why do mortgage lenders need to look at your bank statements? In general, your lender needs to verify that you have enough money coming in to make your monthly payments and that you have enough money in your account to cover a down payment. Your lender will also want to see that you have at least a few months’ worth of mortgage payments available. They’ll likely check any and all of your bank accounts during this process.
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. Both sourcing and seasoning help prevent fraud and money laundering and also assure your lender that you aren’t using a loan for your down payment.
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 2% – 5% 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.
How Many Bank Statements Do I Need To Provide?
You’ll usually need to provide at least two bank statements. Lenders ask for more than one 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.
How To Find Your Bank Statements
It’s easy to find your bank statements through your financial institution’s website. Here are a few quick steps, though each financial institution’s website will be slightly different.
Log In To Your Account
Visit your bank or credit union online and log in to your bank account. If you don’t know your login details, you can call your bank’s customer service line and ask for help.
Locate Your Statements
You should see a tab labeled “Documents” or “Statements” on your bank’s home screen. You may have to navigate through a tab labeled “Account Details” first before you see the documents tab.
Download Your Statements
From this tab, you should see a number of links to PDF files labeled “Statement” and the corresponding dates. Find the right statement and download it. Save the files somewhere where you can easily access them. If the filename is a string of numbers and letters, rename it to something that both you and your lender will understand. A name like “February account statement, Bank of America" is perfect. Repeat these steps until you have at least two statements from all of your accounts and deliver them to your lender.
What Do Underwriters Look For In Bank Statements
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 or not 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.
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 your income changed drastically in the last two 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 two 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 need to know that you have more than enough money in savings to cover your home loan. Each lender has an individual standard for how much you should have in savings, but most want to see at least a few months’ worth of payments in your account. They also want to see that you can pay your 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.
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 example, maybe your parents gave you a lump sum of money as a gift for your down payment. You may need to ask your parents for a copy of the transfer slip or their bank account statement as proof, as well as a gift letter stating that it does not need to be repaid.
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.
The Bottom Line
A bank statement is a monthly or quarterly document that lists all of your banking activity. In addition to other documentation, lenders evaluate your bank statements to ensure you’re a reliable candidate for a mortgage.
You can improve your chances of getting a loan by keeping your finances consistent and being responsive when your lender asks for financial information. Don’t take out any major loans at least six months before you apply for a mortgage. Watch your account balances to avoid overdrafts. If your lender asks you for more bank statements or explanations, be ready with documentation.
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