"You don't judge a book by it's cover" is a particularly relevant phrase when you're in the market to buy a home. Upon reviewing online listings to see what houses are up for sale, the pictures of the interior can make a property look like the quintessential location, with plenty of space, gorgeous cabinetry, hardwood floors and custom ceilings. Yet upon closer inspection - which usually involves actually visiting the house with a real estate agent - there's much more to the story that the pictures didn't fully capture. Flooring that wasn't depicted may be in severe disrepair, the roof may leak and the wooden cabinetry could be shoddily constructed.
In short, there's just about always more to the story when it comes to a house up for sale that catches your eye. This same reasoning can be applied to bank statements and why mortgage lenders request them when you apply for a mortgage. You may have the necessary assets, gainful employment or income that makes you eligible to buy a home on paper, but your lender needs to get the back story about various factors. What are those factors? That's what we're about to address, along with tips for what you can do to make this chapter of the mortgage application process seamless.
What do mortgage lenders look for on bank statements?
The overarching reason why your mortgage provider requests a copy of a recent banking statement is to ensure that you have sufficient funds for the house that you're looking to purchase. For most people, real estate is the largest purchase they make in their lives. According to the most recent statistics available from the National Association of Realtors, the typical house in the U.S. costs approximately $265,600. And in certain areas of the country, the median is even higher, such as the Northeast and West ($303,500 and $415,900, respectively).
Examining up-to-date financial records enables your lender to determine if you have the means to pay the asking price of a house and the interest from the loan, whether fixed or adjustable, as well as the closing costs associated with the transaction, whether it’s a purchase or refinance.
Although, it goes a bit deeper than that. In addition to finding out what funds are available, they also need to establish from where they derive. Of course, for most people, the money they earn comes from their employer, and are frequently deposited automatically on a weekly or biweekly basis. That's why in addition to the dollar amount that's deposited, bank statements also detail the date of when the deposits occurred. This helps your lender document consistency and a pattern - or lack thereof - as to how much money is coming in on an ongoing basis and how frequently. For instance, some people - such as those in sales - may receive a commission, so the amounts vary from one pay period to the next. Those who are salaried receive a base pay.
Your mortgage lender doesn't have a preference; they just want to ensure everything makes sense as to how you're paid. The bank statement you provide gives them the context they need to make an informed decision regarding loan approval.
What if my lender can't determine where funds derive?
Although you don't hear about it too often in the mainstream media, Americans usually prefer saving to spending. In fact, according to a recent Gallup poll, most people in the U.S. are saving at least a portion of what they earn and 56% consider themselves to be in "excellent" shape in terms of finances.
But say you have $20,000 in the bank and your lender can't adequately determine where that money came from. If this is the case, you might as well not have it at all. In other words, it isn't enough to have a large sum of money stowed away. Your lender needs to authenticate where, when and over how long a time the funds accrued. In some cases, there may be a simple explanation, such as a gift, end-of-year bonus or lottery winnings. In any of these cases, your lender may need to probe further to obtain greater clarity. This is part of the reason why it's a good idea to work in consultation with your loan officer so you can quickly field questions that arise.
What does the term "seasoned" mean in real estate?
In addition to sourcing, your lender will also check to see if the funds you have are seasoned. As the description suggests, seasoned refers to how long assets or funds have been in your bank accounts. Lenders have different definitions as to the precise time frame that makes assets seasoned, but generally speaking, those that are have been in your account for at least a month. Should deposits exist that occurred in fewer than 30 days, they'll likely ask about what the circumstances were. This may be readily identifiable and not require you to elaborate, but it's important to be familiar with your account activity so you have an explanation for newly available funds.
All that said, what can you do to make this process go smoothly? Here are a few suggestions:
Any relationship is built upon trust, so if you make assertions about what you earn or where money comes from that is untrue, it will likely disqualify you from obtaining a loan. Transparency and honesty are essential.
Know your numbers backwards and forwards
No one knows your financial situation better than you. Familiarize yourself with your bank statement by checking it regularly. Having answers to your lender's questions will help speed things up considerably.
Your bank statement is ultimately a "statement" as to how you manage your finances. If you make charges that cause a check to bounce, it may raise a red flag for your lender that suggests you're not a good loan candidate.
Bottom-line: Although your bank statement may be just one page of the mortgage application story, it can serve as a summary that will help your lender come to the right conclusion about loan approval - and the beginning of homeownership