How Bank Account History Can Affect a Loan Request
Credit reports are a big part of loan applications, but they aren’t the only part. Bank statements and data on your account transactions can be used to check your income, check and analyze your cash flow, check if you own your account, and see if you can afford the monthly payments.
Because there is no one way to analyze accounts, there is no one rule about checking them. While some lenders focus on credit reports and application data, others take bank statements and analyze account transactions with the applicant’s consent. Knowing this helps you get the right data and not make hypothetical assumptions about getting the loan.
Key Takeaways
- While both a bank account history and a credit history may relate to lending, they are separate records.
- When a lender assesses someone’s income and cash flow, they may consider various bank account activities including, but not limited to, deposits, reoccurring payments, account balance, returned payments, and overdraft activity.
- The specifics of what is required differs depending on the lender, type of loan, the amount of the loan being requested, and the other information provided within the application.
- An overdraft and a large deposit may not lead to a loan being denied, but may result in additional questions and/or a request for supporting documentation.
- Prior to accepting a loan, applicants should ensure they have submitted their most accurate and complete financial documentation, and should thoroughly review the loan’s annual percentage rate, all fees, the repayment terms, and the total amount to be repaid.
Bank Account History and Credit History Are Not the Same
A credit report basically tells you what accounts you owe money on, how often you make payments, what your total owed balance is, if you have an account sent to collections, and how often you have your credit checked. It won’t give you the full history of your checking account. A guide to the information in an credit report can help you understand how a credit check exposes information to a lender.
Bank statements show one aspect of how much money a person has. They show how much money goes in and out of the account and what automatic payments start to lower the balance. If a lender uses cash-flow data, they may consider that information alongside credit history, stated income, current debts, and other underwriting criteria.
Deposit-account screening reports form a separate category. Banks and credit unions might use certain consumer reports when making decisions on whether to open a checking account. Those reports might have information on things such as involuntary account closures or negative account balances that were never cleared. While traditional credit reports contain a lot of important information, deposit reports should not be equated to traditional credit reports. Similarly, the use of credit reports when opening an account should not be equated to the review of account statements when a loan is requested.
What a Lender May Look for in Bank Statements
The specific review depends on the lender’s criteria. In the case where a lender requests statements or transaction data, they may look at the following:
Income deposits: The amount, source, timing, and consistency of deposits may verify the claim in the application.
- Cash flow: The lender can see how the inflow of money compares to planned outflow of money and the existing debt payments.
- Balances: Frequent low or negative balances can indicate limited capacity for incurring another payment, but thresholds can differ among lenders.
- Overdrafts and returned payments: Often repeating transactions may be important to an affordability assessment. An isolated case may not be significant or may just require clarification.
- Large or unusual deposits: Lenders may require clarification regarding the source of a large deposit when the deposit is intended to prove income or available assets.
- Account ownership: A lender may use identifying information on a statement to verify the applicant’s ownership of the account.
Account age may provide more history of transactions, but there is no general rule that an older checking account guarantees better loan terms. Similarly, a large deposit on one day may be of very little relevance to demonstrating the ability to repay a loan.
How Overdrafts and Returned Payments May Be Interpreted
An overdraft is when a transaction is completed that exceeds the balance of an account. When a transaction is denied due to an insufficient account balance, it is called a non-sufficient funds transaction, or NSF. Both overdrafts and NSF transactions represent an insufficient balance. However, they represent different circumstances.
A lender may distinguish between an occasional mistake and a repeated pattern. Frequency, recency, the amount involved, and the account’s recovery after the event can all affect how the information is interpreted. No single overdraft has a guaranteed effect across all lenders.
There are many reasons to check bank statements. Returned transactions, transaction duplicates, transactions that you don’t recognize, and transactions that you are being charged for can all be found. If you find an error in your statement it is best to contact your bank, record the statement and keep a record of your dispute.
Why Deposit Patterns Can Prompt Questions
Regular deposits demonstrate a pattern of income; however, a deposit does not always show the source of the funds. Transfers between accounts, gifts, refunds, proceeds from a sale, and borrowed funds are not the same as employment income or disability/other benefits income.
If a lender is analyzing a specific deposit as part of the process, it may require supporting documentation. To establish the source of the income, paychecks, benefits statements, income tax returns, invoices, or a statement may be provided. The lender’s guidelines may be more in-depth and specific for a mortgage or other secured loans as opposed to an unsecured personal loan.
Money should never be transferred between accounts only to artificially enhance the account balance. It is always more beneficial to have a legitimate, accurate, documented balance than to have a temporary account balance that may, and likely will, cause even more questions.
Automatic Payments and Existing Obligations
Statements can have rental payments, utility bills, subscription fees, credit card payments, and other regular debits. These transactions help the creditor estimate what portion of the applicant’s income is spent each month.
Look at your automatic payments before applying. Canceling an unwanted subscription may help your spending, but it does not remove the transaction history from old statements. Most of all, you should report all of your debts and obligations when asked on the application.
Fraud Disputes, Frozen Accounts, and Missing Transactions
A claim of fraud or a temporary limitation placed on a bank’s account is not evidence that someone cannot repay a loan. Still, frozen accounts, or gaps in transaction data, and unresolved claims can lead to delays in data verification, and additional data requests.
Documentation of a bank’s case number, a notice of a bank’s case, and any replacement account records should be kept. If a lender inquires about the event, the borrower should be prepared to inform the lender about the event and offer the documentation as proof. However, the borrower should not provide any information such account passwords or security codes to the lender. A borrower should only provide documentation to the lender in a secure manner.
How to Prepare Before a Loan Request
- Find out what is required. Don’t presume that every lender requires two or three months of statements. Confirm which statement periods and documents the lender will accept.
- Review every page. Make sure names and account numbers are correct and that transactions and activity are familiar.
- Organize everything that provides support for each source of income. Keep pay stubs, benefit letters, income tax documents, and any other documents that are consistent with what is reported on the application.
- Be prepared to provide explanation for anything you expect to be questioned. This may be required for your most recent account change, one time or unusual large deposit, or large transfers.
- Take precautions for your sensitive information. Know your lender and their website. Don’t give up your banking information for what you are being told is an offer. There is no guarantee an offer will be made for an up front payment or sensitive account information.
- Make sure you are budgeting for the payment, not just the cost. Your income and/or expense may change so the payment and current balance may not be the same after considering anything that would change your transaction history.
Review the Loan Terms, Not Just the Decision
Even if lenders access your bank account info, you’re not guaranteed a yes or good terms. When an offer is made, look at the APR, the finance charges, the terms of late payment, the frequency of repayment, and the total amount of repayment. Check whether the scheduled payment due dates align with when dependable income reaches the account.
Be wary of any offer or company that says you are guaranteed approval, that you have to sign immediately, and/or requires gift card, wire and/or crypto payments. Verify the legitimacy of the company yourself, read the entire agreement to make sure you understand what you are giving consent to, and why they are making a withdrawal.
Conclusion
Bank statements can impact a loan request because the lender may use them or analyze your cash flow to assess your repayment capacity by verifying your income. There are many dimensions to a loan application. The impact of your bank statement will vary. Underwriting may still consider your credit history, level of debt, income, and size of the loan request.
The best way to prepare is simple: be honest, identify mistakes in your statements as soon as possible, explain income anomalies, and ensure all potential payments are within your budget. Understanding how the application process works may also help you identify what other documents may need to be submitted.
Frequently Asked Questions
Can a lender see my bank account history without permission?
The lender can either receive the statements you send or get the account data from a service you authorize. This process of consent and disclosure is specific to each lender and each service. You should read the authorization to note how long data access is granted and what information is going to be accessed.
How many months of bank statements will a lender request?
There is no standard period for any loan. You may have one lender who requires more history for the type of loan you applied for, while another may use a different interpretation of recent statements during their process of income verification. It is important that you refer to the lender’s document request list rather than applying a standard.
Will one overdraft cause a loan denial?
No. That is an inaccurate assumption. Different lenders have different underwriting criteria. An isolated overdraft may not be a significant issue for the lender, while a recent history of multiple overdrafts may be. The lender is likely to evaluate your income, debt levels, credit history, and all information concerning you.
Does a new bank account automatically hurt a loan request?
No. A new account could provide less transaction history and may result in a previous account history being requested. However, there is no specific reason that the opening of a new account would result in denial.
Can bank account history change my credit score?
Regular transactions on a checking account are not usually reflected in a normal credit report. However, a negative balance that is not paid and is sent to collection may reflect in the credit report. Furthermore, some financial products and data-sharing services may use different rules. Make sure to check the terms of any service you allow.
What should I do if my statements contain fraudulent transactions?
Promptly report transactions to the bank or credit union if you notice any unauthorized transactions, and make sure to follow the process for disputes. If a lender asks for the account statements, describe the dispute and send the dispute notice using a secure method.