When you begin the home buying process, it’s not uncommon for your lender to look through your financials, it’s actually required. Your lender is going to be going through your bank statements and other financial documents, this includes any deposits that go into your account. Lenders are going to be looking specifically at the size of your deposits. You may be thinking that the big deposits you do have are going to make your chances for an approval better, however, that is not always the case. Actually, sometimes large deposits can give off a bad vibe to your lender and could cause your lender to deny the loan. So before you make any big deposits, learn how they can potentially hurt your loan application.
What Your Lender is Looking For
The main reason your lender will ask to look at your financials, more specifically, your bank statements for the past few years, is to look at your deposits. In addition to your bank statements your lender may request copies of your pay stubs as well. This allows your lender to better track the money going into your accounts. If you have regular decent sized deposits that match your paystubs, you have nothing to worry about. However, if you have larger deposits that don’t correlate with your income, you will have to explain where that money came from, and usually in the form of a formal written statement. Not only will your lender require a formal written statement explaining the funds, you will also have to show proof of where the money originated. If the lender determines the deposits to be legitimate, you will be in the clear. If you give a poor explanation as to where the money came from or fail to provide proof, you may be faced with some difficulties getting approved for a loan.
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Why do Big Deposits Look so Bad?
Basically, it comes down to if you have big deposits that don’t match your job or income your lender is going to questions the origin of those deposits, but good news is, there are several lenders who will do everything in their power to work with the deposits that go into your bank, whether you can prove their legitimacy or not in order to get you approved. Below are a couple examples.
- Your lender may wonder if you recently opened a new account, either a loan or credit card account that may not yet reflect on your credit report. The large deposit may have come from said loan, which means, however, your debt ratio is now higher and your ability to repay the loan could be lower, according to your lender.
- Maybe you received a loan from a relative or a friend in an attempt to make yourself more rich-looking on paper; however, in this case, you would still potentially owe someone, just in a less formal/legal way, but this will still bring your debt ratio down, lowering your chances for an approval. By using funds from family or friends to make yourself look richer than you are in order to secure an approval for a home loan, could put you at risk for fraud. Your best bet in this type of situation is to receive a “gift” of money from family or friends, this would be money that is gifted and NOT required to be paid back.
Keep in mind your lender is going to be going back several months’ maybe even years on your bank account statements, and depending on your profession, if you have large amounts that are not easily explainable, be ready to provide proof of their originality. Your lender needs to be knowledgeable and be confident that the money you have is, in fact, legitimate and yours; not a loan. If you do not have proper documentations to back up your deposits you could have a hard time getting approved.
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