How can my bank statements affect my mortgage application?
There’s a variety of factors a lender will consider when deciding whether to approve a mortgage application, most being based on financial matters. As such, it makes sense that your banking and bank statements will come to play a part in your mortgage application process.
When applying for a mortgage, it’s likely you’ll find yourself going through your finances with a fine-tooth comb; but it’s important to understand what you should be looking for, what the lender will look for and how to better your chances.
In this article, we’ll explore the part your bank statements play and how they can affect your mortgage application.
Why do lenders ask for bank statements?
Lenders and underwriters sometimes ask for bank statements when deciding whether to approve a mortgage application. Bank statements reveal a lot about your spending habits, which can be daunting at first thought- but it’s important to remember they could help you evidence that you can be a reliable borrower, even with issues like bad credit.
The lender has a legal responsibility to make sure they lend responsibly- primarily this means making sure you can consistently and affordably meet mortgage repayments over the term of your loan- before agreeing to lend the money, and to take the necessary steps to ensure that they are keeping clear of fraudulent activity.
This comes in many forms, like proving your employment or income source, your expenditures, existing credit commitments and so on, but your bank statements could back up a lot of this information in your mortgage application. It is important to note these statements may also flag any spending habits that could create concern for a potential lender.
Your bank statements can allow the underwriter assessing your application to get a clear overview of your finances and spending, which in turn allows them to make a judgement on whether to approve the application.
What will lenders look for in my bank statements?
Lenders will usually ask for bank statements dating back to at least 3 months, and the underwriter may use these statements to determine your eligibility on a variety of factors.
Underwriters will want to ensure you can affordably and reliably meet your mortgage repayments. Your bank statements will reflect your income, any regular outgoings and give a snapshot of your spending. This could include general bills, childcare, large purchases or even a routine morning coffee – it all outlines your spending and ability to live within your means.
Availability of funds –
Your bank statement will also reflect whether you have the funds available to go through the process of a mortgage application; considering things such as the deposit (which may need to be traced), fees and the move itself. Some lenders prefer there to be an “emergency cash” reserve but this isn’t always essential to an application.
In addition to payslips and other documents, your statements will also evidence your income- showing the lender you will be able to continually afford to meet repayments. For self-employed applicants who may not have regular payslips, this can be an effective method for proving income flow.
Often, mortgage deposits come from savings with regular income and can be easily traced, but in some cases, you may need to prove where the money for your deposit came from, which is easily verified in your bank statements.
When it comes to deposits from other sources and gifted deposits, the lender will often want to trace the source using bank statements and sometimes other means. This is due diligence on the lenders behalf to ensure no fraudulent activity is taking place and is usually nothing to worry about.
If you are using a gifted deposit to help purchase your home, it could be wise to ask the gift-giver to prepare the necessary statements to help ensure a smooth application process.
What lenders will “look out” for on my bank statements?
The underwriter assessing your mortgage application will also want to ensure there are no “red flags” that could indicate a lending risk. A potential lender will want to be sure they are making a sound financial decision in lending to you, the information found on bank statements can help them do that.
Having an approved overdraft isn’t often an issue with lenders, however the regular use or reliance on an overdraft can raise concerns. Lenders are typically understanding of overdraft use on occasions or seasonal things like Christmas- but regular use of an overdraft could indicate affordability issues and affect your mortgage application. Keeping within your budget and trying to avoid dipping into any overdraft facilities could help improve your chances.
Bounced direct debits –
Bounced or returned DD’s can show lenders that there have been insufficient funds in your account to cover your regular expenditures. As the lender is relying on you successfully making repayments over your mortgage term, it’s important to make sure your DD’s are paid on time and that your bank statements reflect that. If you find you are regularly having DD’s returned, it could be worth seeing if you can re-schedule the DD dates to a known pay-date until your finances have stabilised.
Regular payments to undisclosed sources –
Underwriters have a responsibility to make sure your finances are legitimate and no illegal transactions are taking place before approving a mortgage application. Regular payments to undisclosed accounts or unusual payments can raise flags – this could be anything from fraudulent activity to repayments to an undisclosed credit account -or something entirely innocent. This is why it’s important for the underwriter to have absolute clarity on your cash flow, it saves the guessing game. Make sure your transactions are clear, the destination or source is visible and use relevant references to identify them.
Large cash withdrawals can also sometimes need to be explained, especially if inconsistent with your usual spending habits. If you need to take out a large cash sum, it’s worth making a note of why and what for if it’s not clear in your budget.
Gambling on occasion shouldn’t be an issue with potential lenders, but regular gambling, especially with large amounts can raise red flags.
Putting the odd bet on races or large sporting events is typically considered ordinary; but weekly betting, consistent fluctuations in your finances due to gambling and signs of compulsive spending on it will likely affect your mortgage application. This again leads back to your ability to reliably meet mortgage repayments, so making sure your statements reflect little or no gambling can be another step to increasing your mortgage chances.
Payday loans –
Lenders rarely look favourably on payday loans, finding they often indicate the borrower is struggling to live within their means. Regular use in a short time-frame can also impact your credit score, which again may affect your chances of approval. It could be wise to wait a few months after ceasing the use of payday loans before submitting a mortgage application to help increase your chances.
There are other, seemingly minor things that can affect your mortgage application chances if an underwriter assesses your statements. There are some lifestyle factors that some lenders with more strict criteria could look into. Frequent holidays, especially ones outside of your means can demonstrate a lack of financial responsibility, as can high levels of socialising or unbudgeted spending. Keeping your accounts clear and tidy could help increase your chances of being approved for a mortgage.
Credit commitments –
Having credit commitments doesn’t mean you can’t get a mortgage, and even if you’ve had difficulty repaying in the past there are plenty of bad credit mortgage providers willing to work with customers who have had financial trouble. However, they all require honesty with your commitments and affordability. If you are making repayments to creditors you haven’t disclosed, or have more credit commitments than you can manage, this will flag in your statements and could negatively affect your application.
What can I do to prepare my bank statements for a mortgage application?
To get your bank statements spick, span and application ready you should make sure all of your income, outgoings and general spending is well accounted for. Staying on budget, avoiding spending habits that could raise red flags for potential lenders and keeping your income & expenditures well documented can make for far healthier and attractive bank statements in the eyes of a lender.
Your Mortgage Broker and Lenders usually ask for statements dating back to around 3 months, so even if your current statements could present issues, you can get your accounts tidied and increase your chances in the near future.
Not all lenders will want to look at your statements, but if you are applying for a mortgage with bad credit or looking for a mortgage approval following a rejection from another lender, it’s likely you’ll have your finances looked at more closely to make sure you can manage the extra credit commitment. Our mortgage brokers will always ask for bank statements and will help you find out which lenders are most likely to approve your application based on your financial situation and sometimes access a better deal or rate than advertised on the general market. Get in touch to find out how we can help!