For some people, acquiring mortgage loans is the only way to purchase a house. In this case, there are many things the lenders will consider during the loan application process. This may include a wide variety of legal and financial documents – including a bank statement. So, what is a bank statement? How does this financial document affect the outcome of a loan application?
Simply put, a bank statement is a monthly financial report provided by your bank. It summarizes your banking activity to help you keep track of your money and spot any inaccuracies faster. Your bank statement is one of many deciding factors that lenders will consider when reviewing your loan application.
This article explains everything you need to know about bank statements and their influence on a mortgage loan. This may include other information, such as the reason lenders need this financial document and the general instruction on how you can get your bank statement. So, without further ado, here is everything you need to know about a bank statement.
What Is Bank Statement?
As previously mentioned, a bank statement is a financial document that summarizes your banking activity, typically within a monthly or quarterly period. This type of financial document contains bank account information, such as account numbers and a chronologically-ordered list of deposits and withdrawals. Most banks send monthly statements to account holders on a predetermined date.
The delivery mechanism for the statement varies between banks. Many banks offer account holders the convenience of using paperless statements. Typically, customers can log in to their online bank account and download their electronic version of the bank statements, also known as an e-statement, to be printed on their own.
What Are Bank Statement Loans?
Bank statement loans can be your best option to acquire mortgage loans for your desired house if you can’t provide tax returns or W-2s. As stated by Bankrate on June 29, 2022, this type of loan is suitable for self-employed individuals who are seeking a mortgage for home purchases. Unlike traditional mortgage loans, a bank statement loan allows you to apply for a mortgage loan with only your bank statement.
According to Bankrate, bank statement loans work differently than traditional mortgage loans. For instance, instead of providing a bank statement for the past two or three months, you’ll need to provide the mortgage lender with a bank statement for the last two to three years. In addition, you need to provide the lender with information about your business, including profit, loss statement, number of employees, etc.
Although more convenient, bank statement loans have their downsides. For instance, most bank statement mortgage loans carry a higher interest rate. Depending on your credit score, you may need to provide a higher down payment. As stated by Bankrate, the minimal credit score for bank statement loans is 620, but higher than 700 will grant you a better rate and terms.
Why Do Mortgage Lenders Require Bank Statements?
As previously hinted, bank statement mortgage lenders will consider many things before deciding to give you a mortgage loan. Some of the considerations may include your credit score, credit reports, and a bank statement. Those reports and documents are required to make sure that you’re capable of returning the borrowed mortgage loan at the determined period. In addition, they need to make sure that you’re capable of covering the down payment.
The other reason mortgage lenders check your bank account statement is to make sure that your asset is sourced and seasoned. The term sourced means that the lender knows where your assets are coming from. In addition, seasoned means that all the funds in your account have been there for a while and not just appear suddenly. In addition, sourcing and seasoning help prevent any fraud and unlawful financial activities.
What Do Underwriters Look for In Bank Statements
The underwriter, or the person who evaluates mortgage applications, looks for several key indicators on bank statements. As stated by The Mortgage Reports on February 18, 2022, the key indicators are:
- Sufficient cash to cover the down payment and the closing cost. While the down payment depends on your credit score, the closing cost typically ranges between 2% to 5% of the loan’s total cost.
- The source of your down payment must be suitable to the lender’s guidelines.
- Sufficient and steady cash flow to make your monthly mortgage payments.
- The availability of cash reserves, which are additional funds in case of emergencies.
In addition, an underwriter wants to see that the assets in your bank account are yours and not borrowed from someone else. An exception will be given if you have proof of properly-documented down payment gifts. In other words, any funds in your bank account must be sourced and seasoned.
Things You Should Avoid in Your Account Statement
While the previous sections show all the things you should have in your account statement, this section compiles everything you should avoid. It is essential to note that an underwriter will not only look for preferable factors but also some red flags. These red flags can range from unstable income to overdrafts. All of them will reduce your chance of getting the mortgage loans you need to purchase your desired house.
So, if you wish to apply for bank statement mortgage loans, be sure to avoid the following financial red flags.
- Unstable income
To make sure that you’ll be able to pay the monthly mortgage payments, lenders need to know that you have enough money coming into your account. In addition, they also need to make sure that the money comes at a steady rate. In most cases, an underwriter prefers a regular source of income, including paychecks, royalties, or court-ordered payments.
On the other hand, unstable and drastically changed income will be considered prominent red flags for bank statement mortgage loans. A large amount of undocumented deposit may indicate that your down payment or closing cost comes from unacceptable sources, such as illegal gifts. If you can’t provide documentation proving that the big deposit is acceptable under the loan program guidelines, the lender must disregard your loan application.
That being said, there are several circumstances in which borrowing a down payment is allowed. As stated by The Mortgage Reports, some of the acceptable sources of down payment include gifts from a family member and a down payment assistance program. To ensure the bank statement mortgage loans lender that your large deposit comes from acceptable sources, disclose where the down payment money came from.
- Irregular activities
Tim Lucas, via The Mortgage Report, defines irregular activities as monthly payments that do not correspond to a credit account disclosed on your application. In most cases, credit card reports will include credit cards, auto loans, and other debt accounts. However, some creditors do not report the activities to the major credit bureaus.
As a result, the monthly payments on your bank statement will most likely alert the lender of a non-disclosed credit account. This will affect the underwriter’s and lender’s decision to not grant you with bank statement mortgage loans you need for your residential purchase.
- Low savings account balances
Victoria Araj via Rocket Mortgage on August 15, 2022, considers low savings account balances as one of the financial situations you should avoid in your bank statement. As previously mentioned, lenders will make sure that your deposit can cover the closing cost, the down payment, and the monthly mortgage payments of your mortgage loan. Having a low savings account balance may hesitate lenders from granting you mortgage loans.
While each lender has their own standard on how much deposit you should have in your savings account, most of them want to see at least a few months’ worth of payment available in your account. In addition, most lenders want to see that you can pay the down payment and closing costs without any help from other parties.
The last factor that will most likely fail your attempt at getting bank statement mortgage loans is the high number of overdrafts. Simply put, an overdraft is when you spend or withdraw the money that you don’t have in your account. While most lenders tolerate one or two overdrafts in one account, multiple and repeated overdrafts are major red flags for mortgage lenders.
The underwriter may consider regular overdrafts as loan applicants’ failure at managing their finances. It also shows that you’re prone to borrowing funds for more than you can afford to pay back. As a result, lenders may rightfully reject your loan applications if you have many overdrafts in your bank account statement.
How To Get a Bank Statement
As previously mentioned, you can get your bank account statement in different ways. In this digital age, one of the simplest ways to get a bank statement is from your financial institution’s website. However, as stated by a 2021 Paw Research Center research by Andrew Perrin and Sara Atske, 7% of Americans don’t use the internet in their daily life. As a result, paper-based bank statements are still in use until now.
Below are some methods by which you can get your bank account statement.
- Banking website
As previously mentioned, finding your account statement from your financial institution’s website is the easiest method you can do. Each financial institution’s website has its own steps to access a banking statement. The general instruction will mostly involve logging in to your account and downloading the banking statement in a PDF format.
1. Customer service
If you don’t have access to online banking, you can call your bank’s customer service line to request a copy of your account statement. You can find your bank’s customer service line on your deposit report or debit card. The requested copy can either be delivered via email in a digital format or delivered via postal service in a paper-based format.
2. Monthly paper-based request
Besides asking your financial institution for sending the banking account statement one time, you can also request them to send the statement monthly. This may involve receiving the banking statement via post service. This method is suitable if you frequently need the statement for certain reasons other than mortgage loans.
FAQs On Bank Statement Mortgage Loan
Below are some of the most frequently asked questions on the account statement for mortgage loans.
What is a bank statement?
A bank statement is a piece of a financial report summarizing your banking activities at a certain period. Bank statements are mostly used to help you keep track of your money and spot any inaccuracies faster. However, in bank statement loans, your bank statement is one of many factors that lenders will consider when reviewing your loan application.
How to get a bank statement?
Today, the simplest way to get a bank statement is by downloading it in a digital format from the bank’s online banking website. If you don’t have access to online banking, you can call their bank’s call center line to request a bank statement to be delivered to you, be it digitally via email or manually via post service.
How many years of bank statements do I need for a mortgage?
For a bank statement loan, you’ll typically need to provide two months of your most recent statement from any accounts you’re planning to use for a loan application, As stated by Quicken Loans on January 18, 2022.
If your bank doesn’t provide monthly account statements, you can use the quarterly report. In traditional mortgage loans, you may need to provide up to three years of account statements.
Do you have to show all bank statements for a mortgage?
No, most mortgage lenders only require you to provide your most recent banking account statement, typically the last two to three months. Depending on the loan provider, you may need to provide your yearly banking account statement instead of monthly or quarterly.
A bank statement is one of many things you should provide when applying for mortgage loans from a lender. Lenders use bank statements to determine whether you’re worthy of loans. This is done by considering several factors, including income stability, fund sufficiency, and the availability of cash reserves.
In addition, there are several financial situations you should avoid in your bank statement, including suspicious financial activities, overdrafts, and low cash reserves. So, be sure that your banking statement is free of problems that may hinder your attempt to apply for loans.