Understanding How Do Lenders Verify Bank Statements for Loans

Lenders verify bank statements to ensure borrowers can afford loan repayments.

They review statements for discrepancies, such as missing transactions or incorrect account balances.

Lenders may request up to 12-18 months of bank statements to assess a borrower's financial history.

This allows them to identify any irregularities or patterns of financial behavior.

Preventing Fraud is crucial in the mortgage process. According to CoreLogic's Mortgage Fraud Report 2023, about 1 in every 134 mortgage applications contain fraud in the second quarter of 2023.

Mortgage fraud occurs when an individual gives fraudulent information to a mortgage lender. Recent technologies are helping to forge documents that look original.

To prevent mortgage fraud, lenders can look for irregularities in the bank statement. Corroborating the bank statement with other documents provided is also essential. Contacting the bank to ensure the bank statement is genuine is a must.

Lenders scrutinize bank statements to verify a borrower's financial stability and ability to pay their mortgage. They typically ask for a 60-day history of bank statements to ensure borrowers have enough funds for the down payment and closing expenses.

Unusual deposits exceeding $200 must be explained, and overdrafts, even for as little as $5, can raise concerns about a borrower's financial responsibility. A single overdraft in the past 12 months can impact mortgage loan approval.

Lenders want to see that borrowers have liquid assets, such as savings accounts, stocks, and easily convertible items, to cover mortgage payments in case of a financial emergency. Having 6 months of current income in cash/liquid assets is recommended to ensure mortgage payments can be made.

Mortgage underwriters scrutinize bank statements for a 60-day history of your accounts to verify if you have enough funds for the down payment and closing expenses.

They look for unusual deposits and overdrafts, particularly irregular deposits exceeding $200, which must be traced back to their source.

A single overdraft, no matter how small, is viewed unfavorably by underwriters, who perceive individuals who overdraft their accounts as lacking financial responsibility.

Lenders specifically aim to see no overdraft instances within the previous 12 months.

Unusual deposits exceeding $200 must be explained by borrowers to comply with lender requests.

Year-to-date overdraft fees can be a red flag for underwriters, potentially leading to denial of the loan application.

Lenders want to verify that you have the means to pay the principal, interest, taxes, and insurance (PITI) on your mortgage. This capability is determined by items you own that have value, like savings accounts, checking accounts, stocks, etc.

These assets are known as "liquid assets", which are easily converted into cash. Lenders want to confirm that enough of your assets are liquid in case of a financial emergency.

To qualify as a liquid asset, cash in your savings and checking accounts needs to be "seasoned", meaning it has been in your account for a considerable time (at least 2 months). Most experts suggest having 6 months of your current income in cash/liquid assets to cover an unforeseen financial issue.

Here's a breakdown of what lenders consider liquid assets:

Keep in mind that non-liquid assets, such as real estate or investments, may require additional documentation to be considered part of your asset portfolio.

Withdrawals don't raise concerns for mortgage lenders. No justification is necessary for withdrawals, regardless of their magnitude.

Lenders may request evidence of regular automatic withdrawals to validate rental payments and fulfill other monthly obligations, showcasing timely bill payments.

Withdrawals can affect the total assets and cash available for closing.

Verifying bank statements can be a complex process, especially when dealing with foreign accounts. Lenders often require additional documentation to ensure the authenticity of the statements.

One common challenge lenders face is dealing with discrepancies in account balances. This can happen when a borrower has multiple accounts or transactions that don't match the statement provided.

To overcome this, lenders may use a technique called "reconciliation" to match the account balances and ensure accuracy.

Another challenge is verifying the authenticity of the bank statements, which can be done by checking for the bank's watermark or security thread. This can help lenders confirm that the statement is legitimate and not tampered with.

Lenders may also use software to analyze the statements and detect any inconsistencies or red flags.

Manual bank statement verification is a lengthy process that involves analyzing the borrower's income, expenses, debts, and average account balances over the last 2 or 3 months.

This information is cross-verified with other financial documents submitted by the borrower, such as tax returns, pay slips, and employment verification.

Mortgage lenders may contact the borrower's bank to verify the authenticity of the bank statement, but this procedure still carries a high risk of error.

Automating bank statement verification can greatly reduce the need for paper-based document storage, decreasing the cost of the verification process and making it easier to manage bulk document processing.

With automation, lenders can extract critical information using intelligent data capture algorithms, AI, and OCR APIs, making the process faster and more accurate.

Digital banking tools integrate various financial data sources, providing a holistic view of an applicant's financial health and allowing lenders to aggregate information from different bank accounts, credit cards, and other financial institutions.

Automation can bring quite a few efficiencies to your workflow, including being more confident in your data capture and analysis, built-in fraud detection, and increased speed and efficiency.

Here are some ways to improve the bank statement verification process:

By adopting automation solutions, lenders can improve and safeguard their functions, enhance the customer experience, and increase income transparency.

The shift to digital verification of bank statements has brought efficiency and accuracy, but it's not without its challenges. One of the primary concerns is the privacy and security of borrowers' financial data.

Loan companies have a responsibility to ensure robust data protection measures to prevent breaches and unauthorized access. This is especially true in regions with strict regulations like the European Union's General Data Protection Regulation (GDPR).

Borrowers must be informed about how their data is used and given control over their privacy choices. Transparency is key to maintaining trust and integrity in relationships with customers.

The extent to which financial data is analyzed is a critical ethical consideration. Loan companies must navigate these waters carefully to avoid raising concerns about data usage.

If you've had an overdraft within the past year, you're not required to provide your bank statements to mortgage underwriters. They can obtain two months of printed bank statements from the bank itself, which will be accepted as substitutes for the actual statements.

These printed bank statements will be signed, stamped, and dated by a bank teller, and as long as you don't have any overdrafts in the past 60 days, you'll be safe.

It's worth noting that many banks extend overdraft protection to deposit account holders with credit scores above 680, so it's a good idea to inquire with your bank about this possibility.

Having overdraft protection in place is highly advisable, but it's not a guarantee that you'll be approved for a mortgage.

If you've had bank overdrafts within the last 12 months, you'll need to obtain 60-day bank statement printouts from your bank.

These printouts must feature a column showing year-to-date overdraft fees, which will alert the underwriter to your past overdrafts.

You can use these printouts in place of the original bank statements, as long as they're authorized, dated, and stamped by the bank teller.

If you've experienced recent overdrafts and lack other bank accounts without overdrafts, your best option is to wait for sixty days to allow the overdrafts to season during this period.

Borrowers with no overdrafts within the last 60 days can simply submit their genuine bank statements covering the past 60 days, which will satisfy the lender's criteria.

This 60-day period is a crucial time frame that lenders look at when analyzing bank statements, so it's essential to plan ahead and manage your finances accordingly.

Sourcing Irregular Deposits is a breeze if you have the right documentation. For instance, a $10,000 deposit made within the last sixty days can be easily explained if it's from the sale of a secondary property.

A HUD settlement statement and the corresponding deposit slip or confirmation of the transfer to the bank account will do the trick. This proves the funds are legitimate and not a result of any illicit activities.

Funds from significant purchases like a car, motorcycle, RV, or boat are also acceptable, as long as you submit the necessary documents. A bill of sale, a copy of the check, and the corresponding deposit documentation will suffice.

Digital lending platforms are expected to grow significantly, with a projected market value of $435 billion by 2025.

Traditional lenders are struggling to keep up with the changing landscape, with many consumers preferring the convenience and speed of digital lending.

AI-powered loan verification systems are becoming increasingly popular, allowing lenders to verify bank statements quickly and accurately.

These systems can analyze large amounts of data in real-time, reducing the risk of loan defaults and increasing the chances of approval.

Some lenders are also starting to use blockchain technology to secure loan transactions and protect sensitive customer information.

This shift towards digital lending is driven by consumer demand for faster, more convenient, and more secure loan options.

Digital lending platforms can also provide more inclusive lending options, allowing consumers who may have been rejected by traditional lenders to access credit.

Mortgage lenders can save hours, days, and even months of manually verifying bank statement data by implementing an automation solution.

Ocrolus is a trusted solution that improves the efficiency and accuracy of the mortgage lending process with its four core pillars.

These pillars include income calculations and comprehensive analytics gleaned from submitted bank statements, verifying borrower income in minutes, improving turnaround time, the number of bank statements, and the accuracy of the verification, and protecting against mortgage lending fraud and suspicious behavior.

Mortgage lenders can benefit from Ocrolus's automation capabilities, which can save them a significant amount of time and effort.

Here are the four core pillars of Ocrolus's solution:

Irregular and substantial bank deposits are permissible if they can be properly traced to their source. This includes deposits from the sale of a secondary property, as long as the borrower provides the HUD settlement statement and corresponding deposit documentation.

Funds from significant purchases like a car, motorcycle, RV, or boat are also acceptable, provided the borrower submits a bill of sale, a copy of the check, and the corresponding deposit documentation. This shows that lenders are willing to consider various types of transactions when verifying bank statements.

When making cash deposits, it's essential to give them time to be verified by your lender. Cash needs to have been deposited in your account a while before your mortgage application process begins to demonstrate your ability to save money.

Only withdraw cash as needed to avoid having large amounts that may not be verifiable.

Depositing checks directly into your bank account can help you appear more financially stable and responsible to lenders.

Transferring money between bank accounts during the mortgage verification process can be a bit tricky. Avoid making any major fund shifts between your bank accounts until the review is complete.

In many cases, transferring money around in the middle of the verification process can result in the underwriter having to start the process over. This can delay your approval for a mortgage.

Gift funds can be a great way to help with closing costs or a down payment, but it's essential to verify their source during the application process. To use your money safely, provide a bank statement showing a deposit of the funds into your account as well as a bank statement from the gift giver showing that the funds had previously been housed in a legitimate account.

A gift letter verifying the origins of the money and stating that it's not a loan is also necessary. This letter should be signed and dated by the donor, affirming that the funds are a gift and do not require repayment.

Mortgage Underwriters will ask for a canceled check from the donor as proof of the gift funds. The donor is required to provide 30 days' worth of bank statements to illustrate the movement of funds from their account to the recipient's account.

Cash, often referred to as "mattress money", cannot be used for down payments or closing expenses. To utilize these funds, you must deposit them into a bank account and allow them to mature for a minimum of two months.

To prospective homebuyers, I recommend promptly depositing any untraceable funds into a bank account and allowing a two-month seasoning period. This will ensure that the funds are accessible to the lender and can be used towards the home purchase.

Overdrafts can be a problem, especially when it comes to mortgage loan applications. Lenders strictly avoid any instances of overdrawing from applicants within the past year.

Transferring money around during the verification process can delay your approval, so it's best to avoid making any major fund shifts until the review is complete. This can result in the underwriter having to start the process over.

If you have overdrafts in your bank statements, it's essential to submit the correct documents to the lender. You should submit 60-day bank statement printouts that feature a column showing year-to-date overdraft fees, rather than your actual bank statements.

Having multiple bank accounts with overdrafts can be a deal-breaker for lenders. Those with this issue typically refrain from submitting bank statements displaying these occurrences.

If you have had overdrafts before the past 60 days, you can still meet the lender's criteria by submitting 60-day bank statement printouts. These printouts will alert the underwriter that you had bank overdrafts in the past 12 months.