Getting ready for a mortgage application? The idea of having someone poring through your bank statements and private information can feel intimidating at first. But once you know what mortgage lenders are looking for, you'll de-mystify the process.
When preparing for a mortgage, you need to prove not only who you are, but that you'll be capable of making the mortgage payments for the duration of the loan. From the lender's perspective, it's a big risk. They need confidence that you not only take in enough money to afford the mortgage, but that you handle money in a responsible way.
That's why lenders ask for bank statements. Your bank statements are the quarterly or monthly financial documents that show what's been moving in and out of your checking account. When this happens, what are they looking for?
The information you need to provide to mortgage lenders
When you're applying for a loan, you fill out forms that explain who you are. Just as importantly, your application will demonstrate you're capable of paying back this loan. If you have a job, that can mean submitting W2 statements or pay stubs to verify your income. If you're self-employed, it can mean submitting tax returns that show your total income for two years.
But what happens when you've prepped all of this information and the mortgage lender still wants to see what's in your bank statements? The lender is typically looking for a few key elements:
Money coming in. A lender needs to know you have the money coming in to cover the monthly payments. Lenders may apply different standards in this case. Some lenders look for at least three times the mortgage payment in terms of monthly take-home pay, while more conservative lenders may go as high as four times the mortgage payments. If your monthly take-home pay only covers about twice the size of the mortgage payment, it may raise some red flags.
Covering the down payment. Without the down payment, the mortgage agreement doesn't go forward as-written. That's why a mortgage lender will ask to see bank statements and verify that the money for the down payment isn't a barrier to moving the transaction ahead.
Properly sourced assets. Is your income coming from the company you said it was, or is it coming from gambling winnings? That's the sort of thing the lender will want to discover before granting the mortgage. If your income is "properly sourced," meaning it comes from where you say it comes from, you have nothing to worry about in terms of mortgage application hiccups.
It's anything but a formality. But if your income and assets are as you described them in your application, checking your bank statements shouldn't add any anxiety to the process.
What mortgage lenders look for on your bank statements
Now that we know what information mortgage lenders are looking for, let's dig one step deeper. How do they find inconsistencies between your application and what shows up on the bank statement? There are a few you'll want to be aware of:
Income variation. Learning whether you can easily cover the mortgage payments every month isn't just about verifying a pay stub. The mortgage lender may also look into regular sources of income such as investments, alimony, and royalties you collect. Some of these may be less common than W2 employment and pay stubs, but they can have an impact on how the lender views your ability to pay off a mortgage every month.
Savings. Lenders need to know if you have the savings to cover not only a down payment, but the potential closing costs on the deal. But if your bank statements show that you have the income, but not the savings, to allow the deal to go through, it can be another red flag for mortgage lenders. Savings can also help a mortgage borrower in the event of an unexpected medical bill. For lenders, the risk goes up if the borrower has a small margin for error on the mortgage which affects their ability to afford the monthly payments. Money in savings can affect how well the borrower is able to weather these storms.
Two months' worth of statements. A lender may occasionally ask for three months of bank statements, or a full quarter, to verify income and check on the status of your incoming money. However, two months' worth is often enough for them to dig into the financials and figure out whether you're capable of paying off the mortgage.
In addition to what's on the bank statement, a mortgage lender may reach out to you if they notice something unusual, like a sudden and drastic increase in income. You might be able to provide them with a job offer letter to demonstrate that your income went up in the time period shown on the bank statements.
Why do lenders want this information?
The lender isn't just handing over money. They're charging interest on a mortgage note, which means they're making an investment.
While the idea of handing over bank statements might seem intrusive at first, it's really just a tool of verification. Just as submitting tax returns or pay stubs proves your income is what you say it is, bank statements can verify other sources of income, like collecting royalties, alimony, or stock dividends. Having a look at your bank statements helps lenders understand whether your mortgage will be a good investment—or if there's additional work they need to do to verify your application.
Going through your bank statements is less about prying into your financial life and more about securing good terms for the lender. Once you've verified what you filled out on your mortgage application, that's it.
