What Mortgage Lenders Check on Your Bank Statements
Applying for a mortgage can be a detailed process, with lenders scrutinising various aspects of your financial situation to ensure you’re a reliable borrower.
One of the key documents mortgage providers request during the application is your bank statements.
These statements give lenders a clear view of your financial behaviour, helping them assess whether you can afford a mortgage and manage regular payments.
Why Do Mortgage Lenders Need to See Bank Statements?
Lenders request bank statements as part of your mortgage application to verify the information you’ve provided, such as your income, outgoings, and savings. These documents allow them to get a detailed picture of your financial habits and assess whether you’re in a position to afford the loan you’re applying for.
Key Reasons Lenders Request Bank Statements:
- Income Verification: Lenders need to confirm your income is regular and stable. They’ll look for evidence of salary payments or other sources of income such as freelance work or benefits.
- Affordability Check: Mortgage providers will assess your spending to ensure you can comfortably afford the mortgage repayments alongside your other financial commitments. This includes looking at regular outgoings such as bills, loans, and daily expenses.
- Proof of Deposit: If you’re putting down a deposit, lenders will want to see evidence that these funds are available and traceable. They need to confirm that the money is from a legitimate source, whether it’s savings, a gift, or a sale of an asset.
- Risk Assessment: Lenders are cautious about potential financial risks. They will review your bank statements for signs of risky behaviour, such as gambling or frequent overdraft usage, which may suggest financial instability.
Working with Kerr & Watson can help streamline this process. We’ll guide you through the documentation requirements and ensure your bank statements are ready to support your application.
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What Do Lenders Look for on Bank Statements?
When lenders review your bank statements, they are looking for specific information to determine your eligibility for a mortgage. Here are the key things they will focus on:
Income
Your bank statements should clearly show regular income payments. Lenders will verify that your income matches what you’ve declared in your application. Whether you’re employed or self-employed, the income reflected in your statements needs to demonstrate consistency and reliability.
- Regular salary payments: For those in employment, lenders will check for regular monthly salary deposits.
- Self-employed or freelance income: If you’re self-employed, lenders may require a longer history of income to prove stability. Bank statements, along with tax returns, will help demonstrate this.
Outgoings
Lenders will scrutinise your spending habits to assess how much of your income is committed to regular outgoings. They will look for evidence of:
- Regular bills and loan payments: Utility bills, rent, loan repayments, and other regular financial commitments will be considered to calculate your debt-to-income ratio.
- Credit card usage: Frequent use of credit cards, especially if balances are not paid off in full each month, may raise concerns.
- Discretionary spending: While everyday spending on groceries and leisure isn’t necessarily a deal-breaker, lenders may be concerned about excessive spending or patterns of financial irresponsibility.
Overdraft Use
Using an overdraft occasionally is common, but frequent or excessive overdraft usage can raise red flags. If you’re regularly in your overdraft or exceeding your limit, lenders may question your ability to manage your finances and repay a mortgage.
Missed Payments or Returned Direct Debits
Missed payments on loans or utility bills, as well as returned direct debits, can indicate financial mismanagement. Lenders will be cautious if they see a history of missed payments, as this suggests a risk of missed mortgage payments in the future.
Large, Untraceable Cash Deposits
Mortgage lenders are highly vigilant about large, untraceable cash deposits due to concerns about money laundering. Any significant deposits into your account need to be accompanied by a clear explanation or proof of the source, whether it’s a gift, inheritance, or sale of a valuable item.
Gambling Transactions
Frequent or high-value gambling transactions can be a concern for lenders. While occasional gambling may not be an issue, regular or large amounts spent on gambling can suggest financial instability and may reduce your chances of mortgage approval.
How to Prepare Your Bank Statements for a Mortgage Application
Keep Your Accounts in Order
In the months leading up to your mortgage application, aim to manage your accounts responsibly. This means keeping your balance out of the overdraft, paying bills on time, and avoiding any large, unexplained transactions.
Avoid Unnecessary Spending
Try to limit unnecessary discretionary spending, particularly on gambling, expensive purchases, or luxury items. By keeping your outgoings low, you’ll demonstrate that you can comfortably manage a mortgage repayment.
Ensure Income is Clear and Consistent
Make sure your salary or other forms of income are being paid into your account regularly. If you have multiple streams of income, such as freelance work or benefits, ensure these are clearly reflected in your statements with the correct references so lenders can clearly understand your income.
Document Any Large Deposits
If you’re relying on a large deposit from a gift or sale, ensure you have proper documentation to explain the source of the funds. Lenders may ask for additional evidence, such as a letter from the gift giver or proof of sale.
What Happens If a Lender Finds an Issue?
If a lender raises concerns after reviewing your bank statements, it doesn’t necessarily mean your mortgage application is declined. There are steps you can take:
- Work with a broker: A mortgage broker, like Kerr & Watson, can help you look for a lender that is more flexible or willing to overlook certain issues.
- Appeal or explain: If there is a valid reason for a concern on your statement, such as a one-off large expense or temporary financial difficulty, your broker can help explain this to the lender.
- Improve your finances: If you’re not in a rush to apply, take a few months to improve your financial situation. Avoid using your overdraft, cut unnecessary spending, and ensure bills are paid on time. It’s paramount to only take a mortgage when you are in a position to maintain all payments so think seriously about whether now is the time or not.
Conclusion
Understanding what mortgage lenders look for on bank statements can help you prepare your finances to make the application process less stressful. By presenting clear, well-organised bank statements that demonstrate income stability and responsible spending, you’ll give yourself the best possible chance of approval.
At Kerr & Watson, we specialise in people through the mortgage process, including those with non-traditional income or other challenges. Whether you’re applying for your first mortgage or remortgaging, our team is here to guide you every step of the way.
