It’s common knowledge that lenders ask you for your financial statements and bank records when you apply for a mortgage. But what exactly do lenders do with these personal and confidential records?
Taking out a home loan is a game of risk that involves not just you but also the lenders. While you got to obtain the money to own a home, your lenders have to protect their business as well and see to it that the people they are doing business with can give back what they owe.
As a way of mitigating risk, they will require you to prove that you can, indeed, pay back the money you borrow. To do this, you will have to show them that:
- you have a source of income; and that
- you are a responsible creditor
Now showing that you have a job or own a business is not a guarantee that you can repay what you owe. You may lose your job in the future and therefore fail to pay your loans. Or, your business can go bankrupt and you will have no source of profit to sustain your financial responsibilities.
This is why as a means of financial security, your lender will ask for your bank records as means of verifying your statements. These documents will provide your lenders:
a) Proof of Funds
It’s not enough that you have the money there. The lender needs to verify that these funds are legitimately yours. To do this, your lenders usually go through a month’s worth of bank statements to evaluate and verify if all the assets your declared in your loan application is really yours.
b) Proof of Legitimacy
One of the most commonly-encountered issue among mortgage applicants is the cash deposits on their bank statements. Its existence in your account does not automatically guarantee that its sources are yours. Establishing legitimacy then makes it hard for some lenders to verify your finances.
This is the reason why in some cases, lenders ask their applicants to submit statements of explanations regarding their cash deposits. This is especially relevant when your down payment is a gift from a family or relative channeled to your account. If such is the case, the transaction must be duly documented with a notarized gift letter to be honored.
Consistency in your finances is a necessity when you apply for a mortgage. See to it that you properly document your transactions or these might cause delays in your underwriting. Delays in the underwriting process means longer closing time, and most possibly, higher mortgage rates.
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