Loan Approval: Your Bank Accounts Under a Microscope
It’s time to move! You’ve decided to either buy your first home or move into another one.
Before you run out and look at homes there is something you might consider.
I’ve seen many buyers spend hours looking at homes on the internet, or driving around with a real estate agent tramping through property after property, only to find out they can’t qualify for the home they FINALLY loved!
First, it’s a good idea to get approved for a mortgage. A part of this process is making sure your bank statements are in order. This step is key to getting approved.
In the eyes of an underwriter your bank statements tell a story. What story do your statements tell?
Your statements reveal your spending habits, what’s important to you, where money comes from, and where it goes. It is up to the underwriter to review your bank statements and interpret that story.
As a matter of fact, the underwriter looks at all the documents you present in a loan packet, and then determines the next step. Therefore, how the documents are “packaged” can mean the difference between approval or denial. The best approach is to make things as easy, clear, and concise as possible for the underwriter.
Let’s take a look at some simple steps you can take.
Think of your bank statements as the first chapter in a book

The underwriter’s goal is to help get you approved with as little hassle as possible, and to protect the interest of the lender. By making sure all the documentation meets compliance guidelines the underwriter is doing their job.
During the review process an underwriter will look at the items listed below to make sure everything is in order.
The following could become RED FLAGS if found on your bank statements. These items might delay your transaction, or worse, stop it altogether:
- The date, format, and origin of your bank statements
- Overdrafts
- Negative balances
- Income deposits
- Other deposits and their origin, large deposits, or irregular deposits
Let’s inspect each item and see how they could become a potential problem that would alarm an underwriter and stall your loan approval.
Let’s get to know a few characters in the first chapter of your story
The format of a bank statement:
Lenders are picky regarding asset statements and look for anything unusual. Fraudulent and altered documents are prevalent, therefore underwriters are careful in their reviews.
Overdrafts are a BIG Problem
Overdrafts occur when there aren’t enough funds in an account to cover debits. The bank statements you submit for loan approval must be clear of any overdrafts. There is a column in your bank statements that lists year-to-date overdraft fees. This alerts the mortgage loan underwriter that you have had bank overdrafts in the past 12 months. A history of overdrafts could be a roadblock to receiving your loan.
Negative balances even in small amounts spell trouble
If you have a history of overdrafts or negative balances this will be a concern for the underwriter. If this is a recurring theme, reassess whether you’re ready to take on the responsibility of a home mortgage.
Income Deposits:
Most deposits come from earned income. Direct deposit is a common method used for income that goes into a checking or savings account, and it’s easy for an underwriter to verify the net deposit with a pay stub. It’s also easy to see deposits transferred from a business checking account to a personal checking account if you’re self-employed.
If your employer doesn’t use direct deposit, but pays with a physical check, hang on to all pay stubs because they will need to go into your loan packet.
Other Deposits:
Other deposits can come from anywhere — gifts, repayments from loans, tax refunds, insurance settlements, etc. so be sure and keep good records. Documenting the source of these deposits will save you time and headaches when you’re putting your loan packet together.
Large Deposits:
A big concern for lenders is to make sure the funds you use to purchase the home are not coming from an interested third party in your transaction, such as the seller or even the real estate agent.
Lenders verify the source of deposited funds you plan on using for your down payment and closing costs. These sources must be acceptable for purchasing the home.
If you already have a large deposit on your bank statement, an underwriter needs to make sure it’s from an eligible source. If you have a deposit that is legitimate but hard to document, ask your loan officer if you qualify for the loan without showing that bank statement. Or, wait until your bank issues a newer statement and remove older statements that show large deposits.
Be prepared to prove the source of any large deposits. Canceled checks and a letter of explanation with supporting documentation should provide adequate proof. In addition, it helps to get a letter from anyone who gave you money for any reason. If you sold a big-ticket item such as a car, you’ll need the advertisement you used to sell it and the bill of sale. You may also need a third-party estimate of value, such as a Kelly Blue Book value of a vehicle.
Avoid hassles with a large deposit by not depositing any hard-to-document funds into any accounts in the previous 2 to 3 months prior to your loan application. Lenders will assume any undocumented large deposit is from an ineligible source and can deny your loan because of it.
Verify sufficient funds for down payment, closing costs & DTI ratios
The primary reason it is so important to speak with your loan officer in the beginning is to make sure you have enough money for closing costs and a down payment. Often people come up short, or come close to not having enough to cover all the costs.
Let me give you a classic example. With all the crazy things going on in the world today many people don’t trust banks. Folks will keep cash stashed away, but this is a problem because cash is non-existent in the mortgage world. The money you saved that’s either hidden in your mattress or locked away in a home safe is ineligible for downpayment or closing costs unless the money is in your account a minimum of 60 days prior to review.
If you are using gift funds then the donor will have to provide a bank statement
Gift funds are monies that are being gifted to you from a family member for the purchase of the home. The donor of the funds will need to provide a gift letter along with a 30-day bank statement showing the gift funds seasoned in the account.
Recurring payments: disclose everything, and make sure they’re on the loan application
If you have automatic payments that appear on your bank statements the underwriter will make sure they’re also on the loan application. Underwriters will scrutinize any recurring expenses to determine whether they should count in your debt-to-income (DTI) ratio calculations.
No hidden secrets, undisclosed debts are unnecessary surprises
Honesty is the best policy. It’s not a good idea to slip something by on a loan application. And the defense that, “Well, I didn’t think of it as a debt,” doesn’t go over well.
If you have debts or expenses you didn’t disclose during your initial loan application, an underwriter will find them on your bank statement. For example, childcare is a culprit for many borrowers. While it may not be a debt, childcare is a significant, regular obligation.
Is your spouse’s debt included on the loan application?
Murky waters approach on this topic! Spouses that are not on the loan application that have debt may or may not have to include that debt. It depends on your state’s laws and the loan you’re applying for. Be sure and cover this topic with your loan officer and get expert advice. If you don’t disclose all debts in the beginning, adding them later could reduce the loan amount you qualify for or lead to outright denial.
Conclusion: It’s not as bad as it first may seem
Now before you get queasy, keep in mind the underwriter and lender want to give you a loan! You’re their customer and it’s their job to help you. But it’s also their job to issue good loans to creditworthy consumers.
To make things easier, keep in mind a few things.
- The loan approval process isn’t about whether the underwriter likes you or not. It’s all about compliance. Meaning, your loan application and supporting documents need to meet underwriting guidelines to get the stamp of approval.
- Knowing what it takes to get your loan approved could make or break a deal for you.
- Being prepared will give you more control over the process of getting approved.
- With a little foresight and planning, you’ll ensure your home purchase or refinance application is smooth sailing.
If you follow these simple strategies and meet the lending guidelines you will be well on your way to home ownership!
