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 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.
