Traditional Bank Statement Underwriting
Up until early 2010 underwriters rarely scrutinized transactions on bank statements. Generally speaking, bank statements were collected to show the applicant had enough money in the bank for a long enough time to meet the program requirements. In the business we call that sourced & seasoned funds. The source is what bank account they came from the seasoning is they the funds were in the applicants account long enough.
Usually, the money was for a down payment, but sometimes loan programs require that you have several months of your housing payment in the bank after closing. If you satisfied the underwriter that you had enough money, they also needed to know that you didn’t just deposit the money otherwise, it’s possible the money wasn’t really yours, so they would make sure your balance consistently showed enough money over a two month period.
If an underwriter was content with your source & seasoning then they would simply make sure that you didn’t have overdrafts.
Current Bank Statement Underwriting
Until early 2010, when underwriting started to request explanations for deposits that were irregular. At first, the scrutiny was only on deposits that were large and large depended on the opinion of the underwriter. I would say that usually meant the deposit had to be over $250, if there were not many deposits and they were mostly small. If a person had lots of $200-300 deposits they may focus on the ones that stood out and were $400 or more.
By the end of the year, those requests had gotten more and more common, until we got to the point that really any non-payroll related deposit is questioned. And until you begin to look you would probably be surprised at how many non-payroll related deposits you have. Now that I look for it, it seems that the majority of borrowers have one to two non-payroll deposits over a two month period and that is if they are not self employed. Many who work home based businesses have one a week or more.
Ways to prepare
Given this is an across the board requirement regardless of lender, loan type, credit score, or any other factor I can think of, you should know what explanation and documentation is expected. First, write a simple to the point letter that explains how the source of the money and why it was given to you.
“Something simple like, the deposit made March 13th for $130 was gift money received at my birthday party on March 7th. The other deposit of $421.83 was an expense reimbursement for a recent business trip.”
Then to the best of your ability you should provide documentation to support your claim. For the birthday money you’re going to be ok with the letter as long as your birthday is March 7th. With the expense reimbursement you will need some proof. Your company will have an expense report of file and possibly copies of the receipts. That will do.
An even better idea is to avoid depositing any non-payroll funds from now until you close on your mortgage. Instead you can cash that birthday money and spend that on groceries or eating out and save your checking account for whatever else you were going to buy with the birthday money. If you do it will make your life easier. Either way, if you’re expecting to get a mortgage in the near future take a look at your bank statements with the eyes of an underwriter and start documenting anything that doesn’t look normal.
Tim Swierczek, MMS, CRMS