One of the final and most critical stages in closing on your new home mortgage is to provide bank statements demonstrating sufficient funds in your account to satisfy your down payment, closing fees, and reserves, if applicable.
When you’re in the process of purchasing a new home, emotions run high, and time is of the essence.
This is NOT the moment to discover that your loan officer did not adequately explain the significance of your bank statements at the closing table.
For example, here’s a common question:
In December, I will close on a house. I’m aware that the amount for closure must be shown in my bank account. Is it required to include at least one mortgage payment amount?
When you go deeper into this topic, you’ll discover that there’s much more to it than meets the eye.
Analysis of Bank Statements
When you’re at the closing table, simply having money in your bank isn’t enough. The underwriter will go over your bank statements, searching for odd deposits and determining how long the funds have been in your account.
This underwriting criterion is known in the industry as the “Source and Seasoning” of your funds being used to close. In addition, the underwriter must sign off on your bank statements before the lender funds the loan.
The source of your cash is not always where the funds are saved, but rather proof that the funds have been in your account and may be verified on the most recent two months’ records.
Deposits made before the most recent two months’ asset statement are deemed seasoned and do not need to be sourced. Most lenders need seasoning in the form of statements covering the most recent 60 days before closing.
Closing Costs and Reserves
When estimating how much money you’ll need on your account at closing, consider both closing fees and any reserves necessary by the financing program you’re using to purchase your property.
Closing Costs: An Overview
Closing expenses must be sent from your bank account to the closing table, whether it’s an attorney or an escrow company, depending on where you’re buying in the country.
Closing costs may include, but are not limited to, the following:
- Fees for closing services (escrow or attorney fees)
- Fees for title searches
- Fees for recording
- Taxes on transfers
- Fees charged by lenders
- Interest paid in advance
- Impounds paid in advance (taxes and hazard insurance)
- Pre-paid HOA fees (homeowners association)
Reserves should be verified but should not be removed. Reserves are liquid funds that may be used as needed.
Reserves are sometimes measured by having a particular number of months of PITI (principal, interest, taxes, and insurance) saved and ready to withdraw.
Reserves are most common in FHA loans with low credit ratings and most conventional, jumbo, and portfolio loans.
FHA and VA will not normally exclude you via the automated underwriting system if you do not have reserves, but having funds can balance risk as a compensatory factor if you have difficulty gaining an automatic underwriting approval.
Standard reserves can be obtained from, but are not limited to, the following sources:
- Accounts for checking or saving
- Life insurance payouts in cash (if withdrawal is allowed)
- 401(k) or other types of retirement plan (if withdrawal is allowed)
- Stocks, bonds, and other liquid assets are valued in cash.
Reserves may be complex since they differ considerably from one loan program to the next, and they are also a typical “overlay” added to the underwriting standards by a lender.
It is also fairly unusual for a lender to merely implement reserve requirements to screen out loans that they believe are more likely to default in the future.
Using Gift Funds?
Gift funds can be used for closing expenses and/or reserves on most loan types. In addition, gift monies from close family members such as a mother, father, sister, or brother are nearly usually accepted.
Accepting gift monies is best accomplished by having the donor wire the funds straight to the closing table. Most underwriters would want statements from the donor to confirm that the funds were available for gifting.
The gift provider should also sign a Gift Letter declaring their relationship to you (the buyer), the amount of the gift, and their knowledge that the money is a gift and is not expected to be returned.
Gift funds are seasoned in the same way closing costs and reserves are, often statements covering the most recent 60 days before closing.
Note: Gift money received before the most recent two months’ account statements are considered seasoned funds and do not need to be sourced.
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