Bank statements: 3 things mortgage lenders don’t want to see

Tim Lucas
The Mortgage Reports editor

What do mortgage lenders look for on bank statements? 

When you apply for a mortgage, lenders look at your bank statements to verify that you can afford the down payment, closing costs, and future loan payments. 

You’re much more likely to get approved if your bank statements are clear of anything questionable. 

Red-flag issues for mortgage underwriters include:

  1. Bounced checks or NSFs (Non-Sufficient Funds charges) 
  2. Large deposits without a clearly documented source
  3. Monthly payments to an individual or non-disclosed credit account

Fortunately, you can fix a lot of issues before they become, well, issues. Here’s what to look for, and how to deal with problems you find.

Verify your home buying eligibility (Jun 13th, 2021)

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How far back do lenders look at bank statements?

Lenders typically look at 2 months of recent bank statements along with your mortgage application.

You need to provide bank statements for any accounts holding funds you’ll use to qualify for the loan.

Lenders use these bank statements to verify your savings and cash flow, check for unusual activity in your accounts, and make sure you haven’t taken on any recent debts.

Two months worth of bank statements is the norm because any credit accounts older than that should have shown up on your credit report. 

One uncommon exception is for self-employed borrowers who hope to qualify based on bank statements instead of tax returns. In this case, you will need to provide the past 12-24 months of bank statements.

What underwriters look for on your bank statements 

The underwriter — the person who evaluates and approves mortgages — will look for four key things on your bank statements: 

  1. Enough cash saved up for the down payment and closing costs
  2. The source of your down payment, which must be acceptable under the lender’s guidelines 
  3. Enough cash flow or savings to make monthly mortgage payments
  4. “Reserves,” which are extra funds available in case of an emergency

An underwriter generally wants to see that the funds in your bank accounts are yours, and not borrowed from someone else (unless via a properly-documented down payment gift).  

In other words, any funds used to qualify for the mortgage need to be “sourced and seasoned.”

“Sourced” means it’s clear where the money came from, and any unusual deposits are explained in writing. And “seasoned” typically means the money has been in your account for at least 60 days. (So the funds should show up on the two months’ bank statements you’re required to provide.)

Bank statements also prove to underwriters that you haven’t opened up any credit accounts or created new debt prior to getting the mortgage. 

Do lenders look at bank statements before closing?

Lenders typically will not re-check your bank statements right before closing. They’re only required when you initially apply and go through underwriting.

However, there are a few things your lender will re-check before closing, including:

  • Credit score
  • Credit report
  • Employment and income

You should avoid financing any large purchases or opening new credit lines (like a credit card) between mortgage approval and closing.

New debts can affect your credit score as well as your debt-to-income ratio (DTI), and could seriously affect your loan approval and interest rate.

In addition, if anything changes with your income or employment prior to closing, let your lender know immediately so it can decide whether this will impact your loan approval and help you understand how to proceed.

Verify your home buying eligibility (Jun 13th, 2021)

3 things mortgage lenders don’t want to see on bank statements 

You might want to take a look at your bank statements with a mortgage underwriter’s eye before turning them into the lender.

That’s because the lender looks for red flags that, if found, can require lengthy explanations. 

Mortgage underwriters are trained to unearth unacceptable sources of funds, undisclosed debts, and financial mismanagement when examining your bank statements.

Here are three things you can look for on your bank statements that might turn up a red flag for a mortgage company.

1.  Bounced checks

If your checking account is littered with multiple overdrafts or NSFs (non-sufficient funds) charges, underwriters are likely to conclude that you’re not great at managing your finances.

Mortgage rule-making agency Freddie Mac says that additional scrutiny is required when bank statements include NSF fees.

FHA loans require lenders to manually re-approve borrowers with NSFs, even if the borrower has already been approved by a computerized system.

2. Large, undocumented deposits

Outsize or irregular bank deposits might indicate that your down payment, required reserves, or closing costs are coming from an unacceptable source.

The funds might be borrowed. For instance, you could take a cash advance on your credit card, which might not show up on your credit report.

A large deposit could also indicate an “illegal” gift. A home buyer can’t take help from a party who stands to gain from the transaction — like the home seller or real estate agent. 

So, what’s considered a “large” bank deposit by mortgage lenders? 

  • 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.”
  • Likewise, Freddie Mac lists “recent large deposits without acceptable explanation” as red flags about which lenders should follow up with the applicant

If you can’t prove through documentation that the source of a big deposit is acceptable under the program guidelines, the lender must disregard the funds and use whatever is left to qualify you for the loan.

If the verified funds aren’t enough to qualify you for a loan, you’ll need to save another chunk of cash — from an acceptable source.

That said, borrowing a down payment is allowed. You just have to disclose where the down payment money came from. This must be considered an “acceptable” source, like: 

If you did receive a large deposit recently — and it wasn’t from one of these sources — you may want to wait 60 days before applying for a mortgage. 

At that point, the funds become “seasoned,” meaning they are now your funds, despite the source.

It’s still not a good idea to take funds from a party with interest in the transaction. That breaks a myriad of other rules. 

But if your family member paid you back for a recent vacation, or you sold a car to your aunt and didn’t document it, waiting 60 days could be a solution.

3. Regular payments, irregular activities

Watch out for a 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 $300 automatic payment on your bank statement, however, is likely to alert the lender of a non-disclosed credit account.

Verify your home buying eligibility (Jun 13th, 2021)

A bank “VOD” (verification of deposit) won’t solve all bank statement issues

Verifications of Deposit, or VODs, are forms that lenders can use in lieu of bank statements. You sign an authorization allowing your banking institution to hand-complete the form, which indicates the account owner and its current balance.

VODs have been used to “get around” bank statement rules for years. But don’t count on them to solve the above-mentioned issues.

First, the lender can request an actual bank statement and disregard the VOD, if it suspects potential issues.

Second, depositories are also required to list the account’s average balance. That’s likely to expose recent large deposits.

For instance, if the current balance is $10,000 and the two-month average balance is $2,000, there was probably a very recent and substantial deposit.

In addition, there’s a field in which the bank is asked to “include any additional information which may be of assistance in determination of creditworthiness.”

That’s where your NSFs might be listed.

There are good reasons to double-check your bank statements and your application before sending them to your lender. The bottom line is that you don’t just want to be honest — you want to avoid appearing dishonest.

Your lender won’t turn a blind eye to anything it finds suspicious.

FAQ on mortgage bank statements

Why do mortgage lenders need bank statements? 

Mortgage lenders need bank statements to make sure you can afford the down payment and closing costs, as well as your monthly mortgage payment. Lenders use your bank statements to verify the amount you have saved and the source of that money. They want to see that it’s really your cash — or at least, cash from an acceptable source — and not a discreet loan or gift that makes your financial situation look better than it really is.

How many bank statements do I need for a mortgage?

Mortgage lenders typically want to see the past two months’ worth of bank statements.

Do I have to disclose all bank accounts to a mortgage lender?

If a bank account has funds in it that you’ll use to help you qualify for a mortgage, then you have to disclose it to your mortgage lender. That includes any account with savings or regular cash flow which will help you cover your monthly mortgage payments.

What do underwriters look for on bank statements?

When underwriters look at your bank statements, they want to see that you have enough money to cover your down payment and closing costs. Some loan types require a few months’ worth of mortgage payments left over in the account for emergency “reserves.” In other words, the upfront costs can’t drain your account. 

Underwriters also want to see that all the funds in your accounts have been “sourced and seasoned.” That means the source of each deposit is acceptable and verified, and the funds have been in the account long enough to show they weren’t a last-minute loan or questionable deposit.

Do mortgage lenders look at savings?

Yes, a mortgage lender will look at any depository accounts on your bank statements — including checking and savings — as well as any open lines of credit. 

Why would an underwriter deny a loan?

There are plenty of reasons underwriters might deny a loan. The two most common are insufficient credit and a high debt-to-income ratio. As far as bank statements are concerned, an underwriter might deny a loan if the sources of funds can’t be verified or aren’t “acceptable.” This could leave the borrower with too little verifiable cash to qualify.

How long does it take an underwriter to make a decision?

Underwriting times vary by lender. The time it takes an underwriter to approve your mortgage could be as little as two or three days, or as much as a week. Big banks tend to move more slowly than non-bank mortgage lenders.

Do you qualify for a mortgage loan?

Bank statements are just one of many factors lenders look at when you apply for a mortgage.

Almost all areas of your personal finances will be under scrutiny; including your credit score and report, your existing debts, and any source of income you’ll use to qualify for the loan.  

These factors help determine how large of a loan you qualify for, as well as your interest rate. The cleaner your finances look across the board, the better deal you’re likely to get on your new home loan or refinance.

Verify your new rate (Jun 13th, 2021)