When applying for a mortgage, banks will scrutinize your financial history to determine if you are eligible and can afford the loan. But how far back do they look? Here’s what you need to know about the mortgage approval process.
Checking Your Credit Report
One of the first things lenders do is pull your credit report from the three major credit bureaus – Equifax, Experian, and TransUnion. This provides details on your payment history, amounts owed, length of credit history, new credit, and credit mix.
The typical credit reporting timeframe is the last six to seven years. However, some negative items can stay on your report longer:
- Late payments: 7 years
- Collections: 7 years
- Charge-offs: 7 years
- Bankruptcies: 7-10 years
- Foreclosures: 7 years
- Tax liens: Typically 7 years, but up to 15 years if unpaid
The bank will look at credit accounts you’ve opened in the last ten years when you apply. Making payments on time in the past shows that you can responsibly handle your debts.
Reviewing Bank Statements
Lenders also look at your bank statements, usually from the last two months. They want to see that you make regular deposits of income and that you have enough cash for the down payment, closing costs, and reserves.
Underwriters check for red flags like:
- Insufficient funds
- Overdrafts or bounced checks
- Large, unexplained deposits
- Suspicious transfers or withdrawals
If you’re self-employed, the bank may look at statements from the last 12 to 24 months to make sure you’ve been making money. Problematic patterns could require further documentation or result in denial.
Looking For Job History
Employment history is another key factor. The lender wants to see reliable earnings to ensure you can afford the mortgage.
Most of the time, underwriters want to see two years of steady work history. Gaps could mean less qualifying income. Frequent job changes may signal instability.
For W-2 employees, the bank verifies your employment and income using recent pay stubs, W-2s, and tax returns. Self-employed borrowers have to provide additional business and tax paperwork.
Analyzing Your Assets
Along with income, lenders check you have enough assets – cash, investments, etc. – to cover the down payment and closing costs. For certain loans, you also need reserves equal to a few mortgage payments.
Banks review current account balances and statements to confirm your funds. The money must be “sourced” meaning it can be traced to an acceptable origin like payroll, gifts, sale proceeds, etc.
Gifts require a gift letter from the donor. Large deposits need documentation showing where the money came from. Mysterious funds may not count toward your eligible assets.
Estimating Your Expenses
Lenders estimate your monthly debts to calculate your debt-to-income ratio (DTI). They tally mortgage payments, credit cards, auto, student loans, alimony, child support, and other recurring bills.
High DTI indicates too much existing debt and raises concerns about affordability. Banks typically assess expenses for the last few months. But they may also consider longer account histories to estimate your ongoing liabilities.
Reviewing Residency History
Banks want to see where you’ve lived for the previous two to three years. They verify your home address to combat fraud and confirm you actually reside where claimed.
Significant gaps in residency history could mean you don’t meet occupancy requirements. For instance, investment properties often mandate you live there for at least a year.
Checking Public Records
Lenders also research public records related to your property ownership, bankruptcies, tax liens, judgments, and foreclosures. These events can impact your eligibility.
Foreclosures usually appear for seven years. Bankruptcies stay on your credit report for seven to ten years. Unpaid tax liens may show up for 15 years. Any red flags require further review.
Requesting Tax Returns
It’s common for lenders to ask for one to two years of tax returns. Self-employed borrowers typically provide returns for the last two years. This helps document your income if it’s not easy to prove via W-2s.
Banks analyze returns for red flags like dramatic income fluctuations. Two years of returns help demonstrate consistent earnings vital to qualifying and managing mortgage payments.
Summary
While credit reports cover about seven years, lenders look back further for income, taxes, foreclosures, and bankruptcies. Be prepared to provide documentation for the last decade to avoid delays. Know your financial background before starting your home loan process.
Regular payments, irregular activities
Another thing to be cautious about regarding bank statements is monthly payments that don’t align with a disclosed credit account on your mortgage application.
Typically, your credit report will pull in your credit cards, auto loans, student loans, and other debt accounts. But some creditors don’t report to the major credit bureaus, such as Equifax or Experian.
For instance, if you got a private, personal, or business loan from an individual instead of a financial institution, those debt details may not appear on your credit report.
However, the monthly $300 automatic payment on your bank statement will likely alert the lender of a non-disclosed credit account.
Large, undocumented deposits
Outsized or irregular bank deposits might indicate that your down payment, required reserves, or closing costs are coming from an unacceptable source.
A large deposit could indicate an illegal gift. A home buyer can’t take help from a party who stands to gain from the transaction — like the home seller or real estate agent.
So, what’s a “large” bank deposit to mortgage lenders?
- Fannie Mae’s Selling Guide says, “When bank statements (typically covering the most recent two months) are used, the lender must evaluate large deposits, defined as a single deposit that exceeds 50% of the total monthly qualifying income for the loan.”
- Likewise, Freddie Mac lists “recent large deposits without acceptable explanation” as red flags about which lenders should follow up with the applicant
If you can’t prove through documentation that the source of a big deposit is acceptable under the loan program’s guidelines, the mortgage lender must disregard the funds and only use verifiable funds to qualify you for the home loan.
If the verified funds aren’t enough to qualify you for a loan, you’ll need to save another chunk of cash — from an acceptable source.
That said, you may borrow a down payment by most loan programs. You just have to disclose where the down payment money came from. This must be considered an “acceptable” source, such as:
- A down payment gift from a family member or other relation
- Down payment and/or closing cost funds from a down payment assistance program
If you received money from someone else, a mortgage lender requires a gift letter explaining the funds are freely given and not a loan.
If you did receive a large deposit recently — and it wasn’t from one of these sources — you may want to wait 60 days before applying for a mortgage.
At that point, the funds become “seasoned,” meaning they are now your funds, despite the source.
Obtaining funds from a party with interest in the transaction is not a good idea. That breaks a myriad of other rules.
But if your family member paid you back for a recent vacation, or you sold a car to your aunt and didn’t document it, waiting 60 days could be a solution.
What Your Loan Officer Checks On Your Bank Statements
FAQ
How far back does a bank look for a home loan?
Lenders will look at your bank account statements to make sure that you have had enough money in your account for the last year or two to cover your new mortgage payment. This will make them feel better. They’ll also check your credit reports to make sure that you have a history of paying your bills on time.
How far do mortgage lenders look back?
Mortgage lenders typically look back six years into your credit history. This includes reviewing your credit report for information on missed payments, defaults, or other financial issues. According to The Mortgage Reports, they may also ask to see your bank statements, usually from the last two months, to see how much you’ve spent and if you’ve made any big deposits.
How far back do mortgage lenders look at taxes?
Mortgage underwriters will generally ask for one to two years of tax returns when you apply for a mortgage. If you are self-employed, you may be asked to provide additional documentation as proof of your income stability. Mortgage underwriters want to make sure that your income is stable before giving you a mortgage.
How far back do they look at income for a mortgage?
Most of the time, mortgage lenders look at your financial history from the last two to three years, focusing on: Income Employment stability. Credit report.