When you apply for a mortgage, you’ll be asked for a significant amount of documentation. Lenders need to verify your employment, income and assets before determining VA loan preapproval.
One document you’ll provide is a full bank statement for each of your accounts. Bank statements are a window into your spending habits and ability to make sound financial choices. Your bank statement is sent to an underwriter to review once you’re under contract. It’s the underwriter’s job to thoroughly investigate and ensure you’ll be able to meet lender and VA guidelines and also make your mortgage payments. Underwriters then comb through each line looking for questionable transactions.
There are sometimes ways to get around submitting a bank statement, but that’s not always possible. That’s why it’s really important to know the 4 most common transactions that can cause trouble.
1. Overdrafts/Negative Balance
It’s really important to avoid overdrafts and negative balances on your bank statements. That may seem obvious, but it’s true.
Most bank statements have a section showing how many times an account has been overdrawn or in the negative in the past 12 months. These will follow you for a year. Overdrafts and negative balances are a problem because they make you look like you can’t manage your finances appropriately, and that’s a huge deal when you’re asking a lender for hundreds of thousands of dollars.
Do your best to avoid even having one overdraft or negative balance. If you do have one, you’ll probably need to wait until you are a month or more out from the occurrence before you plan to close on a VA mortgage. If you have several, you may want to reassess whether you feel you’re ready for a home purchase or if you need to get your finances in order first. Regardless of whether you have one or ten, be prepared to provide a letter to your lender explaining why each overdraft or negative balance occurred.
2. Recurring Payments
Do you have payments that appear on your statement every month? These are considered recurring and will be scrutinized to determine whether the payment needs to be added to your debt-to-income (DTI) ratio calculations.
For example, most likely you will have utility payments for your current home that you pay every month. It’s unlikely that this type of recurring payment will cause issue because you won’t have that expense when you move to your new home. Maintenance and utility cost calculations for your new home will be a part of your residual income calculation. Similarly, your child’s daycare is an expense that will follow you to your new home, so that will need to be added to your DTI calculations. An underwriter has some discretion with recurring payments, so talk with your VA mortgage specialist about these during your initial VA loan application.
3. Untraceable Deposits (Cash)
Cash isn’t traceable so while cash is king in most parts of life, it can cause problems with your VA mortgage if you don’t document it properly. Let’s talk about two different scenarios. First is the scenario where you have a large savings in cash, and the second is cash income.
If you plan to use cash savings in your mortgage transaction, from a down payment to closing costs or other fees, this cash will need to be documented. Your best bet in this situation is to deposit the cash into a savings account several months before you start the mortgage application process. If this isn’t possible, then you’ll have to provide a letter of explanation going into significant detail. An underwriter may even want to see a budget showing how you were able to save up this cash. The underwriter has discretion here, and they may not allow you to use this cash if he doesn’t feel your documentation is sufficient.
If you receive any type of income in cash, you will face an uphill climb if you want to use it for qualification purposes. For many who work in the service industry or other jobs that receive cash income regularly, one option of getting over this hurdle is to provide two years of tax returns as proof of income. If you don’t claim the cash on your taxes, you’re likely out of luck.
4. Undisclosed debts
If you have debts or monthly expenses you didn’t disclose during your initial loan application, an underwriter will find them on your bank statement. This is why it’s always best to disclose everything at the outset.
Two common undisclosed debts are for childcare or a non-purchasing spouse’s debts. If you pay any type of child care expenses, you need to notify your VA loan specialist when you apply for the loan. Childcare expenses are included in your debt-to-income ratio, and with child care costs being so high, it could have a significant impact on the amount of loan you can obtain. Another common situation occurs when a borrower applies for a loan and doesn’t include their spouse on the application. If the spouse has debt such as a student loan or car payment, those separate debts must be included on the loan application. If you don’t disclose all debts at the start, adding them later could result in a sizable reduction in loan amount or outright denial.