When a mortgage lender requests your bank statements, it can be for a variety of reasons. Bank statements can be one of the biggest causes of frustration in the mortgage process and lead to multiple requests for more paperwork if your lender isn’t up front with what they’re looking for. That’s where we come in!
For some loans, bank statements are used to calculate income – in these instances, a lender is looking primarily for deposits that are consistent and can reasonably be averaged (usually over a period of 12 or 24 months) to determine what a borrower’s real monthly income is. When trying to determine income, the key word to make a lender happy is consistent. If there’s one check in one month for $100,000, and no deposits the rest of the year, the lender will have a hard time establishing that as regular income.
While bank statement loans (bank statement for income) are still a small percentage of all loans, it’s a growing market segment. Today, though, most bank statement requests have to do with assets and reserves. A lender wants to see that you have the cash that’s needed to close your mortgage loan in an account where the funds can be traced. This is partially due to compliance and partially due to risk mitigation – the lender needs to make sure that the source of funds is from an above-board place, and they also need to ensure the funds aren’t borrowed or obtained through another means that could put the lender’s loan repayment in a risky position.
Some things to look out for? Number one on the list of potential headaches is “large deposits”. Most lenders consider a large deposit any non-payroll deposit that accounts for more than 50% of a borrower’s monthly income. If there are large deposits in your bank statements, they’ll need to be explained and potentially documented. This can cause a lot of headache if the account the deposits came from also has large deposits (you can see where this leads down a wormhole of documentation).
Another thing many lenders look for these days is recurring debits in the same amount month over month. Lenders want to verify they’ve accounted for all monthly debts, and if there’s a recurring debit for the same amount around the same time each month, it may also require an explanation.
So what’s a borrower to do if they have complicated finances, regularly transfer funds around, or mix business and personal finances? Well, good news is most lenders (bank statement for income loans aside) want to see a consistent history for 2 months. So if you know you’ll be buying a home or refinancing into a situation that requires reserves or cash needed at closing, get your finances together a couple months in advance. Transfer from savings or retirement into your checking account or whatever account will be used at closing, and leave the money there. Or better yet, get 2 months worth of all asset statements together in advance of being asked for them. Be sure to include all pages (lenders will not accept only pages 1-3 if page 3 says “3 of 4″, even if page 4 is just a blank statement page!), and don’t cross out things like account numbers or certain transactions. Your lender isn’t interested in your personal life, they just want to ensure their loan is underwritten properly, and they can’t accept altered documents, regardless of what is altered.
Like with most things mortgage related, a little bit of preparation in advance of actually needing your loan funds can save you headache. Working with an expert loan officer will set you up for success, too, as your loan officer can review your financial and let you know exactly what you’ll need up front, saving you from the headache of repeat documentation requests during the loan process.