The mortgage application process involves submitting bank statements that accurately reflect your financial health and readiness for a mortgage commitment. Lenders closely scrutinise these statements to assess your spending habits and ensure that your income is stable and sufficient for the mortgage payments.
This guide covers what lenders look for in your statements, how to highlight your financial stability, and tips for addressing potential red flags.
Why lenders need your bank statement
Your bank statements provide a clear, factual record of your income over a period of time, usually at least three to six months. This allows lenders to see if your income is regular and stable so you can keep up with mortgage repayments. For those who are self-employed or have variable income, bank statements are more important since they offer the most reliable proof of financial stability.
Lenders also use bank statements to understand how you manage your money. They look for regular outgoings, such as bills and other loan repayments, to assess your existing financial commitments.
High levels of spending or evidence of regular overdraft use might indicate financial stress or poor money management, which potentially make you a higher-risk borrower. It's not just about the ability to repay the mortgage, but also about how responsibly you manage your finances.
Lenders also need to ensure that the source of your deposit and your ongoing funds are legitimate. Bank statements provide a trail of your funds, which allow lenders to perform their due diligence and adhere to legal requirements to prevent cases of money laundering.
This is why it's important to avoid any large, unexplained deposits or withdrawals, since these can raise red flags about the source of your funds or financial stability. Regular savings and a history of managing debt responsibly reflected in your bank statements can significantly strengthen your mortgage application.
What lenders look for in your bank statements
When lenders look for several specific details in your bank statements, they assess the following that affect your financial health and suitability for a mortgage:
1. Proof of income and employment stability. Lenders verify your income to ensure it matches what you've declared on your mortgage application. They look for consistent deposits from your employer to verify if you have a stable job and a regular income. For self-employed individuals, they may look for regular income patterns to assess the stability of the business.
2. Spending habits and financial management. Your bank statements reveal your regular spending habits and how you manage your finances. Lenders look for red flags like frequent overdrafts, returned payments, or insufficient funds charges, which indicate financial stress or poor money management.
3. Existing liabilities and recurring payments. If you have any ongoing debts or financial commitments such as loan repayments, credit card bills, and other regular outgoings, lenders assess these to calculate your debt-to-income ratio, which is an important indicator of your ability to afford additional debt. High existing liabilities may raise concerns about your capacity to manage additional mortgage repayments.
4. Deposit source verification. It's crucial for lenders to verify the source of your deposit to ensure it's legitimate and not borrowed. This is part of anti-money laundering checks. They look for large, unexplained deposits or irregular financial activity, which could be red flags for money laundering or financial fraud.
5. Regular savings and financial resilience. Lenders prefer applicants who demonstrate a habit of saving. Regular contributions to a savings account can indicate financial discipline and resilience, suggesting that you are more likely to manage mortgage repayments effectively.
Red flags in a bank statement
Certain issues can trigger a rejection, since they may raise concerns about your financial stability and ability to afford a mortgage. Here's a closer look at the issues.
Large, unexplained cash deposits in your bank account can be a red flag for lenders. They may suspect that these funds are not from a reliable or legal source, which could indicate potential financial instability or involvement in illegal activities. They need to ascertain the origin of your funds to comply with anti-money laundering regulations and to ensure that your income and savings are sustainable and legitimate.
If you’re regularly dipping into an overdraft, this can suggest to lenders that you struggle to manage your finances effectively. It raises concerns about whether you can handle additional financial commitments like a mortgage. Lenders prefer borrowers who live within their means and have a buffer in their finances to accommodate unexpected expenses.
While receiving a deposit from an employer isn't necessarily problematic, it can, however, raise questions. Lenders might wonder if this is a regular income or a one-off payment. If it's a one-off, they may doubt your ability to save and question the sustainability of your financial situation.
If you bring in funds from accounts abroad, it can be complicated due to the difficulties in tracing the source and legitimacy of these funds. Lenders need to ensure compliance with international money laundering regulations. There may also be concerns about the stability and accessibility of these funds over the long term.
Regular or large transactions related to gambling can be a significant concern for lenders. It suggests high-risk financial behaviour and potential for financial instability. Even if these transactions are from winnings, lenders may view gambling as a risky and unreliable source of income.
Finally, if you use too much of your payday loans, it indicates that you may be experiencing financial stress or you're living beyond your means. Payday loans often come with high interest rates and are considered a last resort for borrowing. Their presence on your bank statements can suggest poor financial management and a high level of existing debt, which are major red flags for mortgage lenders.
How to address potential red flags in your bank statement
1. Show a steady employment history and consistent income. Provide payslips, tax returns, or other documents that prove your income has been stable and reliable over time. For self-employed individuals, a stable or increasing income over several years can be particularly persuasive.
2. Demonstrate a pattern of regular savings and prudent investments. A solid savings account, investment portfolio, or other assets like property or retirement funds can indicate good financial health and discipline. This also shows that you have reserves to fall back on in case of financial difficulties.
3. Maintain a low debt-to-income ratio. Lower ratios suggest that you have a good balance between income and debt so you can comfortably take on a mortgage.
4. Maintain a strong credit score and a history of managing credit responsibly. This includes making timely payments on credit cards, loans, and bills. Avoid any actions that might harm your credit score in the months leading up to your mortgage application, such as taking on new large debts or missing payments.
5. Your bank statements should reflect controlled and consistent spending habits. Avoid frequent overdrafts, bounced payments, or impulsive, large purchases. Lenders prefer borrowers who live within their means and manage their money wisely.
6. Ensure your financial records are organised and transparent. This includes having clear explanations for any large or unusual transactions in your bank statements. Being able to account for your income and expenditures shows that you are in control of your finances.
7. Avoid making multiple credit applications just before or during the mortgage application process. Doing so can result in hard searches on your credit report, which may temporarily lower your credit score, and signal financial distress or instability to lenders as well.
What to do if you’ve been declined by a lender
If you were declined for a mortgage due to red flags on your bank statements that can be frustrating, but there are steps you can take to address the issues and improve your chances for future applications:
1. Understand why you were rejected. Request a detailed explanation from the lender on why your application was declined. Understanding the specific concerns or red flags will help you target those areas for improvement. Common issues might include irregular income, high levels of debt, or evidence of risky financial behaviours.
2. Based on the feedback, take steps to rectify any negative aspects of your financial behaviour. This could involve reducing unnecessary spending, avoiding overdrafts, paying down debts, or stopping any gambling activities. Demonstrating a period of financial stability will be crucial in future applications.
3. Start building a stronger credit history. If your credit history was a contributing factor, work on improving it. This means making all your debt repayments on time, reducing outstanding credit balances, and not applying for new credit in the short term. You can also review your credit report for any errors and have them corrected.
4. A larger savings buffer can help offset concerns about financial stability. Aim to increase your savings to show that you have a safety net in place and can manage your finances effectively.
5. If irregular or unstable income was an issue, focus on stabilising it. This may involve securing a permanent job, providing evidence of consistent work if you're self-employed, or resolving any issues that cause fluctuations in your income.
6. Consider consulting a financial advisor or a mortgage broker. They can provide personalised advice on improving your financial situation and guide you through the mortgage application process. They can also help you find lenders who might be more amenable to your financial circumstances.
7. At times, it is best to wait and address the issues raised. This might mean waiting until you have a longer history of stable employment, improved credit, or a stronger savings record.
8. Consider alternative lenders who specialise in lending to people with unique financial situations. However, be cautious and fully understand the terms and conditions, as these loans might come with higher interest rates.
After doing these, when you're ready to reapply, make sure you prepare your documents thoroughly. This includes ensuring your bank statements reflect responsible financial behaviour, your credit score is as strong as possible, and you have all the necessary documentation ready.
Work with a mortgage broker
Mortgage brokers have extensive knowledge of the mortgage market and can provide expert advice tailored to your specific financial situation. They can help you understand the reasons behind a mortgage rejection and advise on steps to improve your financial profile.
Brokers can conduct a thorough review of your finances, including analysing your bank statements, to identify any red flags or areas of concern. They can then offer practical advice on how to address these issues, such as improving your credit score, managing debts, or rectifying spending habits.
They also have access to a wide range of lenders, including some who may not be directly accessible to the public. They can identify lenders who are more likely to accept your application based on your financial history and current circumstances, even if you've previously been declined.
If your financial situation is complicated, such as being self-employed or having a mixed income, they are experienced in dealing with non-standard applications and can save you time and lower the stress involved in the application process.
How The Mortgage Hut Can Help You
Whether you're a first-time homebuyer with limited knowledge and experience in the property market, or someone planning to remortgage your home, The Mortgage Hut has dedicated professionals ready to guide you in preparing for your mortgage application.
Reach out to a knowledgeable advisor today by dialling 02380 980304. You can also reach us via email at info@themortgagehut.net or secure your spot by scheduling an appointment through our contact form. You may also refer your friends to us so we can help them make the right mortgage option today.
