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Bank statements reviewed for closing costs and reserves at closing table

How Bank Statements Can Kill Homebuyer Hopes at the Closing Table

Avoid Surprises

One of the final and most important steps toward closing on your new home mortgage is to produce bank statements showing enough money in your account to cover your down payment, closing costs, and reserves if required.

When you’re buying a new home and approaching the finish line, emotions are high and timing is tight.

This is NOT the time to find out that your loan officer did not properly explain how important your bank statements will be at the closing table.

I received a question from one of our readers last week.  Reading deeper into the question, there’s much more here than meets the eye.

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The Question

I am closing on a home in November.  I know my bank account has to show the amount for closing.  Does it have to show at least one mortgage payment amount also?

Thanks, 
Rhonda

Analyzing Bank Statements

Simply having money in your bank when you’re at the closing table is not enough.  The underwriter will review your bank statements, looking for unusual deposits, and to see how long the money has been in there.

The industry term for this underwriting guideline is the “Source and Seasoning” of your funds being used to close. Before the lender fund the loan, the underwriter will have to sign off on your bank statements.

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The source of your funds is not necessarily where the funds are saved, but more of a verification that the funds have been in your account, and can be documented on the most recent two months statements.

Deposits made into your account prior to the most recent two months asset statement are considered seasoned and do not have to be sourced. The seasoning requirement for most lenders is typically statements covering the most recent 60 days prior to closing.

Closing Costs and Reserves

When calculating how much you need in your account at closing, you should consider both closing costs plus any reserves required by the loan program you are using to buy your home.

Closing costs and reserves differ in that closing costs must be spent, and reserves only need to be saved, documented and accessible in an emergency.

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Understanding Closing Costs

Closing costs need to be wired from your bank account to the closing table, whether it be an Attorney, or Escrow Company, depending on what area of the Country you’re buying in.

Closing costs may include, but are not limited to:

  • Closing service fees (escrow or attorney fees)
  • Title search fees
  • Recording fees
  • Transfer taxes
  • Lender fees
  • Pre-paid interest
  • Pre-paid impounds (taxes and hazard insurance)
  • Pre-paid HOA fees (home owners association)

Understanding Reserves

Reserves only need to be verified, and are not required to be withdrawn.  Reserves are liquid funds that you could have access to if you had to.

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Reserves are typically measured in months of reserves in terms of having a determined number of months of PITI (principal, interest, taxes, insurance) in savings, and available for withdrawal.

Reserves are most common with low credit score FHA loans, and most Conventional, Jumbo and Portfolio Loans.

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FHA and VA typically will not disqualify you through the automated underwriting system if you do not have reserves, but if you have trouble getting an automated underwriting approval, having reserves can offset risk as a compensating factor.

Common sources of reserves may include, but are not limited to:

  • Checking or savings account
  • Cash value of life insurance (if withdrawal is allowed)
  • 401k or other retirement account (if withdrawal is allowed)
  • Cash value of stocks, bonds, or other liquid assets

Reserves can be tricky because they can vary greatly from one loan program to another, and are also a common “overlay” added to the underwriting guidelines by a lender.

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It is not uncommon for a lender to consider reserves as a compensating factor that may allow them to accept higher risk areas of your application, like low credit scores or high debt to income ratios.

It is also not uncommon for a lender to simply impose reserve requirements to filter out loans that they perceive to be of higher risk of future default.

Using Gift Funds?

Most loan types allow you to use gift funds for closing costs and/or reserves.  Gift funds can almost always be accepted from close family like mother, father, sister, brother.

The best way to accept gift funds is to have the donor wire the funds directly to the closing table.  Most underwriters will ask for statements from the donor to verify that they had the money available to gift.

The gift giver must also sign a Gift Letter stating their relationship to you (the buyer), the amount of the gift, and the understanding that the money is a gift, and is not expected to be paid back.

Gift funds are seasoned the same as the closing cost and reserve documentation requirements, which is typically statements covering the most recent 60 days prior to closing.

NOTE:  Gift funds deposited into your account prior to the most recent two months account statements are considered seasoned funds and do not have to be sourced.


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About Your Expert

Scott Schang

A 20 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

Leave a Question or Comment About this Topic

  • John says:

    Hi,

    Do mortgage companies send back bank statements or reports from AccountChek to you?

    Thanks!

    • Scott Schang says:

      Hi John, I’m not sure I understand your question? Companies like AccountChek allow you to keep all of your financial documentation in one place, and you can give your loan officer access. The mortgage company would just get access to your electronic documents.

      If I completely missed your question here, feel free to shoot me an email to scott@findmywayhome.com and let’s see if we can get to the bottom of it.

      Hope this helps?

  • Mandy says:

    Hello Scott,
    I’m applying for a home loan and I have a number of ATM withdraws from a casino. Will this be seen as a red flag from a lenders perspective?

    If so, would waiting 2 months be a better option before applying. I have great credit but I’m concerned this may decrease my chances of being eligible?

    Thanks!

    • Scott Schang says:

      Hi Mandy,
      An underwriter is typically not reviewing withdrawals from your ATM, they are mostly looking for large or unusual deposits. If you have large casino winnings that you’re depositing into that account, you may be asked to document the source of the funds.

      As long as you have enough money in the account to meet down payment, closing cost and reserve requirements, further scrutiny would most likely not even be an issue.

      Hope this helps?

  • KB says:

    Hi Scott.

    We are under contract and close May 2nd. I just sent two months of our bank statements to our lender. I did transfer cash from Paypal to my checking account for medical bills/groceries/etc. at the end of Jan and early Feb. I am so worried about this. The amount is almost $1,000.00. I did let our lender know when I sent the e-mail w/ our bank statements. Any advice? Do you think this will be an issue? Thanks!

    • Scott Schang says:

      Hi KB, as long as your bank balance is enough to cover the minimum reserve requirement for the loan you’re applying for, you should be ok. Worse case, the lender might ask you to source where that money came from.

      Did you have a balance in PayPal? Did someone send you money? Did you use PayPal credit to borrow the money? Those may be questions you get.

      Other rules about deposits will vary depending on if you’re trying to purchase or refinance, and if you’re using Conventional or FHA financing. These rules typically ignore any deposits that are less than 25% of your qualifying income, or 1% of the purchase price (it’s different depending on the situation).

      Honestly though, under $1,000 should not even show up on their radar. I don’t think it’s a concern at all.

      If this is not the first of your concerns, I am happy to introduce you to someone that I know and trust for a second opinion. Closing on May 2nd, you have plenty of time to work with another lender if this one does not “feel” like a good match.

      Hope this helps?

  • Sandra says:

    My problem is cash on hand. I’m getting an FHA loan with the seller paying closing costs. My mortgage guy told me to deposit $5000 into my account. This is cash I’ve saved from different sources. Now I’m being told that I can’t use this money and to get a gift from a relative. What to do?

    • Scott Schang says:

      Hi Sandra,

      I’m so sorry you’re going through this. It doesn’t sound to me like your loan officer has very much experience. You cannot just deposit money into your bank account or it will get this kind of attention.

      At this point, you have 2 options. You can wait for that cash to be in the bank account for 60 days (2 statements), this makes the money “sourced and seasoned”, or you can get a gift from a relative to cover your down payment.

      Are either of those options something you can do?

  • Ambet says:

    So on getting usda loan they told not make big purchases paid some Bill’s and extra taxes returns still have 2000 on account will get denied for it because this I spent money before told me or should be okay USDA loan do look bank statements again at closing table

    • Scott Schang says:

      Hi Amber, if the money is needed for reserves or to cover closing costs, you should not spend that money. There is most likely a “minimum” balance you would need to maintain in order to meet eligibility.

      We typically advise putting all spending on lockdown unless absolutely necessary. You should bring this question to your loan officer immediately. The last thing you want is to be surprised at the closing table because of something that was completely avoidable.

      Hope this helps?