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What Mortgage Lenders Look at When Checking Bank Statements and Paperwork

TLDR

What You Need To Know

  • When applying for a mortgage, lenders assess your credit history, the amount of debt you have and your source(s) of income, among other factors and considerations
  • In addition to your credit report, lenders will need copies of pay stubs, W-2s, tax returns and bank statements
  • Mortgage lenders generally review the last 6 years of your credit history and the last 60 days of bank statements

Contents

For most of us, the first step on the path to homeownership is to apply for a mortgage. When you apply for a home mortgage loan, your lender must confirm that you can repay the loan.

To determine your creditworthiness (think: how much lenders can rely on you to repay a loan), your lender will go over your finances with a fine-tooth comb and ask about your credit history, income, assets and debts and your employment history.

One way to make this process less stressful is to start gathering your financial documents as soon as possible. And we’ve got the 411 on what you’ll need to collect for a lender.

What Do Mortgage Lenders Look at in Your Credit History?

Lenders use your credit history to help determine if you qualify for a loan and to set the loan’s interest rate. 

Credit scores

Your credit score is one of the first things a lender wants to see when you apply for a mortgage. It’s a three-digit number from 300 – 850 that represents how well you’ve handled borrowing money in the past – and paying it back. 

The score is designed to measure your creditworthiness. So, the higher your score, the more a lender will trust that you’ll pay back the money you want to borrow.

To maintain a good credit score, pay your bills on time and keep your credit utilization ratio low.

Credit report

After a lender looks at your credit score, they’ll take a close look at your credit report. The report is an accounting of your credit history (think: payment history, credit accounts and balances). It also includes personal details, including your name, contact information, Social Security number and date of birth.

Mortgage lenders typically review 6 years’ worth of credit history.

A credit report will also include any bankruptcies, civil judgments, foreclosures and tax liens. If any of these are in your report, be prepared to explain them to your lender.

What Do Lenders Look at in Your Bank Statements and Tax Forms?

Lenders will want to know more about how much you earn and how you spend your money. To do that, they’ll check out your bank statements and tax returns.

Income

Mortgage approval hinges on many factors. Your gross monthly income is one of the key factors for loan approval. 

Lenders prefer to lend money to borrowers with stable, predictable incomes. When you apply for a mortgage, the lender will ask for pay stubs, tax returns, W-2s and bank statements. The documents will be used to verify your income and make sure that you make enough money to pay monthly mortgage payments and your other bills.

Debt-to-income (DTI) ratio

Don’t assume that a high income automatically qualifies you for a home loan. How much you earn is one piece of the puzzle. Lenders also want to know how much debt you’re carrying. Enter your debt-to-income (DTI) ratio.

DTI is your fixed, monthly bills (think: rent or mortgage payments, credit card minimums, auto loans, student loans or personal loans) divided by your gross monthly income. 

For conventional loans, lenders prefer a DTI of 45% or lower, but you may be approved with a DTI of 50%.[2] Federal Housing Administration (FHA) loans have a DTI threshold of 43% or lower, but you may be approved with a higher DTI under special circumstances.[3] 

If you’re suddenly wondering what your DTI is, we’ve got a calculator that can do the math for you!

Debt-to-Income Calculator

Itemize Debt for Most Accurate Result
Your debt-to-income ratio…

❓   Curious what your debt-to-income (DTI) ratio is? Enter your figures and let the magic begin!

What Is DTI?

🟢   On Track – Hey money maestro! You’re right on track for your house-buying journey! Make sure you have all the information you need to make the right choice.

How much can I afford?

🟢   On Track – You’re right on track for your house-buying journey!

How much can I afford?

🚨   Above Recommended DTI – Some lenders have different requirements to qualify but it’s worth looking into your credit and finding out what you can afford within your budget.

What Is DTI?

🚨   Too Much Debt – Seems like you’ve got a little too much debt to qualify with the income you’ve put in! Do you want to try again?

Savings and assets

To boost your chances of mortgage approval, it’s important to have enough money saved to cover your down payment, closing costs, monthly mortgage payments and any home and non-home-related emergencies. 

When it comes to assets, lenders will want to know that you have access to liquid assets (assets that can be easily converted into cash). 

Your lender may require information on three types of assets:

  • Cash: Lenders look for checking, savings and money market accounts and certificates of deposit (CDs).
  • Investments: While lenders prefer cash to investments, lenders will accept stocks, bonds and retirement accounts (like a 401(k) or IRA) as qualifying income. Be prepared to submit paperwork for all your accounts when you apply for a mortgage.
  • Collateral: A secured loan (like a mortgage) is backed by an asset, like a house, car, jewelry, artwork, etc. If you default on a secured loan (think: miss payments), the asset will be sold to reimburse the lender.  

Employment history

Lenders prefer to work with borrowers with stable incomes with money going regularly into your bank account. Your employment history is an important consideration for a lender. You’re more likely to get approved with a stable job history.

Once you apply for a loan, the lender may contact your employer to confirm when you were hired and verify that the income you’ve reported matches your employer’s records. A lender may even contact previous employers to ensure that your income is as steady as you’ve indicated.

Short periods of unemployment or a spotty job history won’t automatically disqualify you for a mortgage, but you may end up paying a higher mortgage interest rate than a borrower with a stable income and work history.

What Are Red Flags Mortgage Lenders Don’t Want To See?

As lenders are reviewing your documents, here are red flags they don’t want to see:

Credit report

  • High debt-to-income ratios
  • Charge-offs and late payments
  • Foreclosures
  • Tax liens
  • Bankruptcies
  • Disputed items

Bank statements

Bounced checks (especially if it happens repeatedly) are a red flag for lenders because it signals that you may have a problem managing your money. Another red flag: bank deposits or income without a verifiable source. The lender has to verify that the money is coming from an acceptable, qualified source.

Employment history

You don’t have to stay at a job you don’t like to qualify for a mortgage, but changing your job in the middle of the application process could delay or derail loan approval. If you tend to change jobs frequently, you’ll have more hurdles to clear to verify your income and get a loan. 

Make Sure Your Financial House Is in Order Before Applying

Look, buying a house comes with lots of paperwork. But now you know what to expect. Save yourself some stress and get a head start on gathering your financial information before you start shopping for your new home.

  1. Consumer Financial Protection Bureau. “Credit score myths that might be holding you back from improving your credit.” Retrieved January 2022 from https://www.consumerfinance.gov/about-us/blog/credit-score-myths-might-be-holding-you-back-improving-your-credit/

  2. Fannie Mae. “B3-6-02, Debt-to-Income Ratios (02/05/2020).” Retrieved January 2022 from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-6-Liability-Assessment/1032992131/B3-6-02-Debt-to-Income-Ratios-02-05-2020.htm#DTI.20Ratios

  3. Federal Deposit Insurance Corporation. “203(b) Mortgage Insurance Program.” Retrieved January 2022 from https://www.fdic.gov/resources/bankers/affordable-mortgage-lending-center/guide/part-1-docs/203b-mortgage-insurance-program.pdf

ICYMI

In Case You Missed It

  1. Mortgage lenders will check every aspect of your financial history, from your credit report to the balance in your checking account

  2. Your credit utilization ratio, loan term and debt-to-income ratio can affect your mortgage interest rate

  3. Lenders want to see a consistent source of income, a history of paying bills on time and stable employment

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