How Bank Statements Can Kill Homebuyer Hopes at the Closing Table
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.
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?
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.
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.
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)
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.
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.
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.
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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