What Your Bank Statement Reveals to Lenders
Applying for a mortgage includes providing the lender a substantial list of documentation related to your financial situation. You’ve likely seen the long list of documentation that mortgage shoppers are expected to provide along with their application. While tax returns and W-2s from your employer offer insight into your income, the credit report they obtain confirms your other outstanding debts and payment history.
However, one item likely to be on the list offers an even more detailed look into your money moves. Most lenders ask to see two to three months of your most recent bank statements. While it may be disconcerting to hand over something that can reveal your favorite restaurants or shops, knowing what the underwriters are looking for can reduce your apprehension.
One of the ways a bank statement informs a lending decision is by disclosing your bad habits. But we’re not talking about too much take-out. Instead, they’ll be more interested in your ability to manage your day-to-day finances.
A history of recent overdraft charges or checks that did not clear will be a big red flag that you’re not ready for the responsibility of a mortgage. Similarly, an average daily balance that struggles to stay in the black may prove to be tough to overcome if a mortgage will increase your monthly obligations. Since most lenders will also require some level of reserve funds to remain after closing, the glimpse into your checking and savings accounts confirms you meet those requirements as well.
Several months of bank statements will also demonstrate that you aren’t relying on anyone else to pay your bills. If the bank of mom and dad are making regular deposits to help you out, or your down payment came from somewhere other than your own savings efforts, the lender wants to know about it.
If your records show income or large deposits beyond what is reflected on the W-2 forms you provide, be prepared to explain. Many loan programs allow down payment assistance but require additional documentation from the gifter, ensuring that it won’t need to be repaid.
While your credit report will disclose most of your debt in detail, reviewing bank statements is an opportunity for underwriters to spot any additional obligations that might impact your borrowing power. If you have a personal loan you repay monthly, it will likely need to be calculated in your debt-to-income ratio, even if it does not appear on your credit report.
On the other hand, a history of consistent on-time payments to your utility providers, landlord, or other established entity will showcase your reliability and support your goal of buying a home.
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