I’ve said it before: if a couple of people ask me the same thing in a short period of time, that means there are many more people out there who are afraid to ask. So when I got asked what are the main things underwriters and lenders don’t want to see pop up in a client’s bank statement, I thought I should answer the question here and cover more ground. Please pass along as you need.
Clients should check documentation before giving to the lender
When anyone buys a home with a mortgage, they’ll have to document the income and assets… liquid funds you have available to you. They’ll also have to indicate the source of the downpayment and prove that this source is acceptable under the lender’s guidelines.
This means supplying bank statements. Your client might want to take a look at their account records 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.
Fortunately, clients can fix a lot of issues before they become…yes, issues.
Here’s what they should look for, and how to deal with problems they find.
Bank Statements: 3 Mishaps To Avoid
When a mortgage lender approves a loan, it has ensured the applicant has sufficient funds for the downpayment, closing costs, and reserves — extra funds available in case of an emergency.
These funds must belong to the applicant.
Mortgage underwriters are trained to unearth unacceptable sources of funds, undisclosed debts, and financial mismanagement when examining someone’s bank statements.
Your client is much more likely to get mortgage-approved if the bank statements are clear of anything questionable.
1. Bounced checks
If your client’s checking account is littered with multiple overdrafts or NSF charges, underwriters are likely to conclude that they’re not great at managing their 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 the downpayment, required reserves or closing costs, are coming from an unacceptable source.
The funds might be borrowed. For instance, a client could take a cash advance on their credit card, which might not show up on the credit report.
Borrowed funds will incur additional monthly payments. Borrowing a downpayment is allowed, the client just has to disclose it.
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 — the home seller or real estate agent.
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 your client can’t prove that the source of that big deposit is acceptable under the program guidelines, the lender must disregard the funds and use whatever is left to qualify them for the loan.
If the verified funds aren’t enough to qualify for the loan, they will need to save another chunk of cash… from an acceptable source.
If your client did receive a large deposit recently, they may want to wait 60 days before applying for a mortgage. At that point, the funds become “seasoned,” meaning they are now your client’s funds, despite the source.
It’s still not a good idea for a homebuyer to take funds from a party with interest in the transaction. That breaks a myriad of other rules. But if (for example)a family member paid the client back for a recent vacation, or they sold a car to an aunt and didn’t document it, waiting 60 days could be a solution for them.
3. Regular payments, irregular activities
Advise clients to watch out for a monthly payment that does not correspond to a credit account disclosed on the application.
Typically, the credit report will pull credit cards, auto loans, student loans, and other debt accounts. But some creditors don’t report to the major credit bureaus. For instance, if a homebyer got a private personal or business loan from an individual instead of a bank, those debt details may not show up on the credit report.
The monthly $300 automatic payment on the bank statement, however, is likely to alert the lender of a non-disclosed credit account.
“VOD”: Why Verifications Of Deposit Don’t Solve All Bank Statement Issues
VODs are forms that lenders can use in lieu of bank statements. The homebuyer signs an authorization allowing the 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 clients shouldn’t count on them to solve the above-mentioned issues. First, the lender can request an actual bank statement and disregard the VOD, if he/she 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.” And that’s where any NSFs might be listed.
There are good reasons to advise your clients to double-check their bank statements and the application before sending them to the lender. The bottom line is that applicants don’t just want to be honest… they want to avoid appearing dishonest. Lenders won’t turn a blind eye to anything they finds suspicious.
Of course, each situation is going to be different and we need to take the time to sit down with clients and go over every aspect of a client’s financials and explain to them what issues might arise (a level of services that a computer still cannot do). By adding value like this, we can make and keep clients for life. Please contact me personally if you or your client have any questions about documentation and qualification. I am always here as you need.
If you’re currently working with a Noble Loan Officer, contact them today for more information on any of our programs. Otherwise, I am always available to discuss loan programs, co-branding, and other ways to add value to your business anytime.
Make today great!
Brad Malkin, President
Noble Home Loans