Why Do Mortgage Lenders Need to See My Bank Statements?

Reader question: “I’ve read that mortgage lenders usually ask for bank statements when someone applies for a mortgage loan. I plan to buy a house early next year, and I’m trying to figure out what kinds of documents I need to provide. Why do lenders need to see my bank statements, and is it true that most of them will ask for this information?”

You’ve read correctly. Most lenders will request your bank statements (checking and savings) when you apply for a mortgage to buy a home. Homeowners who are refinancing an existing loan might not have to provide copies of their bank statements. But they are almost always required for purchase loans, which is the situation you’re in. They are one of the many documents you’ll have to provide during the application process.

Why Mortgage Lenders Request Bank Statements

So why does the lender need to see your banking documents? One reason is to verify you have the funds needed for a down payment.

Depending on the type of loan you are using, your down payment might range from 3.5% to 20% of the purchase price. VA and USDA loans offer 100% financing. But most other mortgage products require some kind of down payment. In such cases, the lender will request bank statements to ensure you can cover your down-payment expense out of your checking and/or savings account.

The lender will also want to see that your assets have been sourced and seasoned. Sourced means the lender can determine where the money came from. Seasoned means that the assets have been in your account for a certain length of time.

According to John Allasio from Quicken Loans: “if your assets … haven’t been in your bank account for at least 30 days, then they’re not seasoned, and your mortgage company is going to want to know where they came from and why.”

They also want to make sure you haven’t used a loan for your down-payment funds. Here again, the rules vary based on the type of loan you are using. But in general, mortgage lenders discourage the use of other loans to cover the cost of a down payment. It defeats the purpose of a down payment, which is to show you are a responsible borrower who has saved money to cover part of the purchase. This is another reason why lenders request bank statements with “sourced and seasoned” assets.

The mortgage lender may need to verify that the assets listed on the application truly belong to the person applying for the loan. In order to do this, they typically request at least two months worth of bank statements from the borrower (and the co-borrower, if one is named on the mortgage application).

Last, but certainly not least, mortgage lenders look at bank statements to ensure you have enough money for closing costs. Depending on where you live, and the size of the origination fee charged on your loan, your closing costs could easily add up to thousands of dollars. A rule of thumb is that closing costs typically equal 2% to 5% of the purchase price in a home-buying scenario. The mortgage company will review your bank statements to ensure you have funds to cover these costs.

They Might Check Your Account Balances Twice

First-time home buyers often think they are “in the clear” once they get past the initial documentation process. This is wrongful thinking. In reality, the mortgage lender may check your bank statements and balances more than once during the application and underwriting process.

These days, most lenders review bank accounts at least twice — once during the application process, and once during the underwriting stage. So don’t be surprised if the underwriter checks your balances again shortly before the closing date.

The best thing you can do between the time you apply for a loan, and the time you actually close on the loan, is to keep your finances static and unchanging. If your banking situation remains the same through the entire process, you will be less likely to hit snags along the way. On the other hand, if you withdrawal a large sum of money from your bank account shortly before closing, the underwriter might raise a red flag.

Summary of Key Points

This article explains why mortgage lenders request bank statements from home buyers. Here’s a recap of the key points:

• Underwriters are more strict today than they were during the “easy credit” days of the housing boom. They like to identify the source for every contribution to the borrower’s checking or savings account. This is partly why they look at bank statements before, and possibly during, the underwriting process.
• All deposits must be sourced. In a typical banking scenario, most of the deposits added to a checking or savings account come from the account owner’s regular income. This is easy to verify. But if you have additional deposits from some other source, you will probably have to document the source.
• Lenders also request bank statements to ensure you have the funds required for the down payment and closing costs.
• Some lenders have additional cash-reserve requirements that go above and beyond the down payment and closing costs. In such cases, they will check your account balances to make sure you have enough money to cover your first few monthly payments.
• Different loan programs have different rules for down-payment gifts from family members. For products and programs that allow gifts, the lender might need to “trace” the gift to its source by requesting bank statements from the gift provider.
• Don’t be surprised if the underwriter asks for another set of bank statements (and possibly other documents) during the underwriting stage. It’s common for lenders to verify account balances a second time, just before the closing date.

The best thing you can do between application and final approval is to leave your bank accounts alone. It’s okay to put more money in, through your regular income deposits, or possibly a down-payment gift from a family member. But you should avoid taking money out of your accounts. Banking withdrawals that occur during the mortgage-review process could raise a red flag and lead to delays, requests for additional documentation, etc.