Monday, August 3, 2020

What is a mortgage commitment letter? | Affiliated Mortgage

Applying for a mortgage is an intimidating process that can seem overwhelming. Of course, you must be in good financial standing. Even when you meet that requirement, you may still be wary about the microscope the mortgage lender puts you under. 

While you need cash on hand, the way you handle your cash can also impact your chances of getting a mortgage loan. While this scrutiny may be frustrating, it will be beneficial for you in the end. The lender will assess everything to ensure you are not at risk for defaulting on a loan, which is best for the lender and you as the homeowner. 

To finally get the mortgage commitment letter, known as the approval lender, you must provide several documents that prove you have the money for the loan. The documents you may need to provide can vary, but many times they include bank statements. 

Do loan companies check your bank account? What do underwriters look for in bank statements? 

In this post, we will break down the qualities that underwriters look for and all of the details that you must provide for them regarding your bank accounts. Read on to learn more. 

What do underwriters look for?

To obtain a mortgage commitment letter from a lender, you must demonstrate that you have sufficient funds to purchase the home. Underwriting is the process that the lender uses to verify your assets, income, and debt to determine the approval for your loan. 

The underwriter is the financial expert that examines your financial assets and determines your financial risk. The lender uses this risk to decide if they should provide you with the loan. The underwriter will request certain documents from you, and it is in your best interest to respond as quickly and accurately as possible. The underwriter will verify your identification and check any other information that validates your finances. Underwriters will look at:

  • Credit history 
  • Income
  • Cash reserves
  • Equity investments
  • Financial assets
  • Risk factors

Using that information, the underwriter is attempting to assess your overall risk to not repay the mortgage. The underwriter combines all of the elements of your loan application to determine the level of risk is one the lender should consider. 

Do loan companies check your bank account?

Most mortgage lenders will require bank statements for a mortgage and will need to check your bank account. You will need to submit recent statements from all accounts with funds which may include your checking or savings account. The lender will look for any red flags, which you will have to explain extensively. Because of this, you must inspect the bank statements before submitting them to loan companies. 

What is a bank statement for a mortgage application?

Underwriters view your bank statements as the monthly or quarterly documents that outline your banking activities. You can send statements electronically or by mail. The bank issue statements track your money and display inaccuracies. If you have savings and checking accounts, then a single statement may include activity from both accounts. 

The bank statement summarizes how much money you have in your account, and shows your deposits, cashed checks, and wire transfers. While the statement will include deposits and withdrawals, mortgage lenders will be most concerned with deposits and your overall funds. 

What do underwriters look for in bank statements?

Remember, underwriters look at your bank statements to verify your funds and income. The overall purpose is to determine the level of risk that you pose for the lender. To improve your probability of getting a loan, you should keep your finances consistent and make sure to quickly respond when the lender requests information. 

Underwriters are looking for sufficient funds for the downpayment and closing costs. Underwriters look for any red flags that indicate you would be a risky borrower. For example, the underwriter will look for irregular deposits and overdrafts. You must be able to explain the source for any irregular deposits of $200 or more. 

Additionally, the underwriter looks for overdrafts. You should make sure that your bank statements are free from overdrafts for the last 2 months. 

Do you have to disclose all bank accounts when applying for a mortgage?

You must be able to provide evidence that you have the funds for the down payment. This means that you have to disclose the bank accounts necessary to do this. 

For example, if the down payment is $5,000 and you have these three accounts:

  • $3,000 in account A
  • $2,500 in account B
  • $400.00 in account C

You must provide information for bank account A and B, but you would not need to for account C. You do not have to disclose all bank accounts, but you need to provide statements for the accounts necessary to prove sufficient funds. You can provide all bank accounts, but then they will all be analyzed and will likely lead to more work for you. It’s best to provide the bank account information for only the accounts that you absolutely need to when applying for a mortgage. 

Bank statements for a mortgage: avoid these issues

The mortgage lender needs to determine that you have sufficient funds for the down payment, reserves, and closing costs. Additionally, the funds must belong to you. Mortgage underwriters examine your bank statements to search for any undisclosed debts, unacceptable sources of funds, and financial mismanagement. 

You need to demonstrate that you have sufficient funds. If the underwriter uncovers many overdrafts or NSFs charges, they will determine that you are not good at managing finances. They will approach you with extra scrutiny if your bank statements include bounced checks and NSFs. 

Additionally, any large, irregular bank depositions may suggest your money comes from an unacceptable source. You are allowed to borrow a downpayment, but you must disclose that because the borrowed funds have additional monthly payments. Additionally, the underwriters must ensure that there is not an illegal gift. After 60 days, any large deposits are seasoned and are now your funds, so you may have to wait before applying for a mortgage. 

Lenders also search for monthly payments that don’t line up with the credit disclosed on your application. Non-disclosed credit accounts will also impact your ability to qualify for a mortgage. 

Moving around your money too much is also something that the lender looks at. You will need to do more work to validate a history of money movement including transfers and deposits independent of your income. 

How many months of bank statements do I need to provide for a mortgage?

You may wonder how many bank statements you will need to provide for mortgage approval. While it can vary, most often you will need to provide two months of recent statements for your qualifying accounts. If you cannot get a hold of monthly statements, then you should use the most recent quarterly statement. 

You need to provide multiple statements to assure the lender that the money in the account belongs to you, and was not borrowed from someone else so that you could afford the mortgage. Once the money is in your account for two months, the lender is confident that it belongs to you. Loans that you took out beyond the 2-month time span will have shown up in your credit report. You must be able to explain any large, unexplained deposits on your bank account and provide evidence that they came from an approved source. 

The key is that you need to provide enough bank information to convince the lender that you are not too risky for the loan. Lenders will sniff out any methods that potential borrowers use to attempt to make it look like they are more qualified for the mortgage than they really are. 

How to explain a cash deposit for a mortgage?

You need to be able to explain any irregular cash deposits to the underwriter. Typically, you must provide a source for any irregular deposits of $200 or more. You are allowed to have cash deposits, but they need to be sourced. If you cannot provide the source, then the source cannot be used and it will not count toward the available funds for closing costs and down payments. 

The best way to provide the source is to keep a paper trail. The paper trail should show how the money in one account goes into another and then ends up at the close of escrow. The paper trail must be clear and show how funds moved. 

You can use gift funds from family members for an FHA loan, but the gifted funds must be sourced. You can provide a copy of the canceled check from the donor, as well as the information for how the funds left the donor’s bank account and entered yours. In the event of a financial gift, the donor should provide a gift letter to state that the money is just a gift and does not require repayment. 

Cash itself is not part of the mortgage business. You must deposit your cash in your bank account and then let it season for 2 months to become part of your accessible funds. The lender will not question cash deposits made 2 months prior to the mortgage application. If you plan to purchase a home in the new future, you should deposit the funds in your bank account as soon as possible and let them season for 2 months. 

Do banks look at your transactions?

For the purpose of the loan, underwriters focus on your regular deposits. They will assess which deposits are regular and which are not. The underwriter will ask about the source of the regular deposits, and you must be able to provide the source. You need to be able to source all of your deposits, including any from child support or alimony. 

However, mortgage lenders will not ask about withdrawals, no matter how small or how large. Of course, you must keep in mind that all withdrawals impact your positive assets and the cash you have to close. You can also use automatic monthly withdrawals as evidence for rental verification or proof you are making monthly bills on time. 

Prepare your bank statements for applying for a mortgage loan

Any issues with your bank statements can delay your mortgage application process. It is best to do everything in your power to prepare your bank ahead of time for underwriting scrutiny. For one, you should make any large cash deposits at least 60 days ahead of time. Additionally, you must make sure that you do not have any outstanding balances with the IRS. 

Consider offering a letter of explanation to detail anything that will give the underwriter doubt when reviewing your bank statements. Provide proof ahead of time for the source of irregular deposits. 

Make sure to include all of the pages in the requested document, not just the first page. Your bank statements must include the bank’s name, your name, the account number, the balance, and a 60 day history. 

As you can see, bank statements are one type of document that underwriters must look at to determine the level of financial risk you post to the lender. You should review your bank statements before passing them on, and set your accounts up for the best outcome when you decide you will look to buy a home. For more information on bank statements for a mortgage application, we are happy to help. Contact us today to learn more about the mortgage application process. 

Contact us at (605) 718-9820 or schedule a call and let our mortgage experts help you with your home loan.


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