Banks analyze your spending habits for the same reason medical practitioners take your blood pressure. A routine check up of your spending habits helps the bank determine the health of your finances, which in turn minimizes their risk in approving your mortgage. Conservative to moderate spending habits bode well for your loan approval, and excessive or untimely spending can derail your mortgage altogether. A bank checks your spending habits in various ways before approving your home loan.
Your prior history of spending, saving and financing will help mortgage lenders assess whether or not you are a qualified candidate for borrowing.
Evaluating Recurring Expenses
How you spend your money each month can have an immediate affect on your mortgage approval. Banks check your credit report for outstanding debts, including loans and credit cards and tally up the monthly payments. The home loan application requires you to disclose debts not evident on your credit report, such as alimony or child support. Banks compare monthly payments to gross income to arrive at a debt-to-income ratio. Bank underwriters check these monthly expenses and draw conclusions about your spending habits. For example, several maxed out credit cards might raise red flags with a bank, causing it to scrutinize all other aspects of your financial profile.
Choice of Currency
Your payment of choice can reveal more about your finances than the amounts you spend and where you spend. Heavy credit card utilization, or using more than 30 percent of your account limit, diminishes your credit score and tells the bank underwriter that you might not have sufficient money on-hand to support your spending habits. Unless you pay off your credit cards each month, which subsequently boosts your credit score, the bank may fear that you'll continue to rack up debt, perhaps at an increased pace, after obtaining a mortgage. Because bank underwriters often must make judgment calls, such red flags may not bode well for your loan approval.
Understanding Credit Re-Pulls
Banks want your financial circumstances to remain stable throughout the mortgage approval process and afterward. In addition to pulling your credit when you apply for the loan, the bank can re-pull your credit in the interim and right before closing. Re-pulling credit ensures that you haven't racked up excessive debt and you remain within debt-to-income guidelines. If your credit reveals that your spending habits have affected your monthly payments, the bank must recalculate your DTI ratios and may deny your loan if you no longer meet its standards. It might also require you to explain any recent inquiries from credit card companies, auto financing providers and other creditors.
Undergoing a Bank Check
Banks review checking and savings accounts statements, usually for the most recent two months. The underwriter checks the bottom line and itemized withdrawals and deposits. Banks check for consistent reserve amounts to ensure you aren't depositing borrowed funds or overspending. If your statements reveal withdrawal amounts of several hundred dollars, or amounts that otherwise seem unusual for your account spending habits, the bank may request a paper trail, or an explanation and proof of where the funds went. Draining your bank accounts during the mortgage process may hurt your approval if your funds dip below the bank's minimum required reserve amount.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.