Knowing which financial weaknesses raise red flags for lenders, and avoiding them, can strengthen your chances of loan approval. Lenders are trained to spot financial mismanagement so they are careful to review your finances before they take you on as a mortgage client. A bad risk isn’t good for their business.
Bank statement red flags
In looking over your loan request, a lender will want to make sure you can cover the down payment and closing costs, and ensure you are financially capable of making regular monthly payments for the term of the mortgage. To do that, they look at your bank statements, so it is crucial that all of your documents are in good order. Here are the top things reviewed:
1. Overdraft charges – Generally, lenders consider your last two months of bank statements in their evaluation. Frequent overdraft charges are an indicator that you may not be a good investment risk and that you might have trouble managing your finances.
2. Large deposits – Irregular or lump-sum deposits may also cause a lender pause as they may question if the deposits are illegal or coming from an unacceptable source. You will be asked to qualify large deposits. Otherwise, those funds may not be considered in their assessment of your loan request.
3. Payment patterns – Having consistent, trackable payments is a sign of financial health. Although taking a loan out from mom and dad for that car you needed may have helped you out, it could be seen as a non-disclosed credit account. A loan from a lending institution can be tracked for consistentcy and whether you can make payments on time.
Reduce bank statement scrutiny
You will have a better chance of getting a loan if you keep your bank statements top of mind well before applying for a home loan. Avoid overdrafts and unexplainable recent large deposits. Don’t try and bolster your position by adding funds from a partner or family member. One or two big deposits into your account right before applying could indicate to lenders that the money you claim to have isn’t actually yours or isn’t a “seasoned” asset, meaning the money hasn’t been in your account for at least two months.
Put any amounts owed on auto-pay to ensure timely, trackable payments. Do not make any major purchases within 3 months before applying for a loan, or at any time during the home buying process until after closing escrow. Just before closing, underwriters will analyze your accounts once more. A loan can be canceled at the last minute!
It’s best to organize your bank activity and statements before applying for a loan. It’s difficult to see your dream home go to another buyer because your financial information is in shambles.