Why do mortgage lenders want to see bank statements?

Written by pat kelley
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Why do mortgage lenders want to see bank statements?
Banks need to verify your information. (bank image by Pefkos from Fotolia.com)

There's an old adage in the world of business and politics: "Trust, but verify." When lenders ask for your bank statements, they are fulfilling the last part of the adage, "verify." Lenders want to make sure borrowers are not inflating their earnings and omitting expenses to appear more financially sound.

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Function

Mortgage applications typically ask how a borrower came across the down-payment for a house. Many people receive down-payment assistance from family members. If a down-payment must be repaid, it mars the borrower's credit profile, because the borrower will have less available cash to repay the mortgage while repaying the down-payment. Real estate blogger Rhonda Duffy writes, "If there are deposits that came from sources other than a paycheck, the borrower will need to provide some sort of documentation showing where they got the money." Lenders may want to review a borrower's average daily balance, and whether or not the borrower has recent insufficient funds fees. If you have bounced checks recently, a lender may want to know why.

Considerations

Mortgage lenders were hit hard during the banking crisis of 2007 to 2009, when rising defaults sparked a wave of bank failures and other financial calamities. Some analysts blame lax verification standards by lenders as having a role in the crisis. Lenders even had a term for loans made under looser standards: the NINJA loan, which stands for No Income, No Job or Assets. It's important to note that many of the people who applied for NINJA loans had jobs, income and assets. But the banks made no attempt to verify whether the claims borrowers made were true. In many cases, they approved loans under the belief that the borrowers made more money than they did. In the end, the borrowers defaulted.

Benefits

For banks, the benefits of verifying income and looking for unreported debts are pretty clear. Lenders typically sell mortgages to government agencies and others in a secondary market. Operators in the secondary market have underwriting guidelines. Many lenders make loans knowing what these guidelines are in hopes of selling the mortgage. Once the mortgage is sold, the bank can use funds from the sale to make a loan to a new borrower.

Warning

It might be tempting to fudge the numbers a bit when applying for a mortgage, especially when it can mean the difference between owning a dream home and renting for another year. But lying on a loan application is fraud, and can be prosecuted in criminal courts. According to the U.S. Department of Housing and Urban Development, "When you apply for a mortgage loan, every piece of information that you submit must be accurate and complete."

Insight

The Financial Crimes Enforcement Network, better known as FinCEN, collects Suspicious Activity Reports from banks that suspect a transaction contained some degree of fraud. Banks filed more than 15,000 SARs in the third quarter of 2009, up 7.5 per cent from the third quarter of 2008. FinCEN notes that many SARs are filed in reference to mortgage rescue scams, in which unscrupulous operators collect fees to help troubled homeowners obtain new loans.

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