THREE THINGS LENDERS DO NOT WANT TO SEE ON YOUR BANK STATEMENTS
By Jessica Hudson | July 1, 2020
When mortgage lenders ask to review your bank statements, they are doing so to ensure that you have sufficient funds to cover the down payment and closing costs (and additional reserves, if required). Mortgage underwriters are trained to unearth unacceptable sources of funds, undisclosed debts, and financial mismanagement when examining your asset documentation. If you want to have better odds of being approved for a mortgage, before you apply, make sure your bank accounts do not include these three things in the last two months of statements:
Non-Sufficient Funds (NSF) Charges
When you bounce a check or try to buy something without enough money in your account, it will show up on your bank account as a non-sufficient funds (NSF) or overdraft charge. These are a red flag to lenders that you are not responsible with your finances. Depending on how many you have, a letter of explanation might be required with supporting documentation. If the explanation/documentation makes the underwriter feel you are indeed a financially responsible person, your mortgage approval can proceed. An example of an acceptable explanation of multiple NSF fees might be that someone stole your bank card. In this case, there is usually supporting evidence of the bank crediting you back the funds from the charges in question. If, however the underwriter deems there is not a good enough explanation for the NSFs, your mortgage application will likely be denied. The best plan is to carefully avoid overdraft charges for two months before applying.
Large, Undocumented Deposits
Lenders get suspicious about large, undocumented deposits in the recent past. Fannie Mae’s Selling Guide says, “When bank statements (typically covering the most recent two months) are used, the lender must evaluate large deposits, which are defined as a single deposit that exceeds 50 percent of the total monthly qualifying income for the loan.” Large, unusual deposits could indicate that your down payment or required reserves might be coming from objectionable sources. For example, your lender might think you have taken a cash advance on your credit card to cover your closing costs or down payment. That is just more borrowed money and would put more strain on you to repay your mortgage loan. Large deposits might also indicate an illegal gift for your down payment from either the home seller or a real estate agent. Home buyers are allowed to receive down payment funds as gifts, but they have to be from approved individuals and well documented. Be sure to ask your lender about this before having the funds deposited in your account. Bottom line is if you cannot document that your large deposit is from an acceptable source, lenders will not factor it in to your overall asset reserves.
Regular Payments, Irregular Activities
Watch out for a recurring monthly payment that does not correspond to a credit account disclosed on your application. Typically, your credit report will pull in your credit cards, auto loans, student loans, and other debt accounts. But some creditors don’t report to the major credit bureaus. For instance, if you got a private, personal, or business loan from an individual instead of a bank, those debt details may not show up on your credit report. The monthly $150 automatic payment on your bank statement, however, is likely to alert the lender of an undisclosed credit account. The terms of this account will need to be documented and factored into your debt ratios.
It’s a good idea to begin organizing your bank activity before applying for a loan. Keeping the above items off of your bank statements (or at least being prepared to document them) will allow you to have an easier time applying for a loan and ultimately securing it. Remember to maintain healthy finances throughout the loan process as well as many underwriters do another account review prior to closing.