How Bank Statements Can Help You Secure a Mortgage
If you are in the process of applying for a mortgage you may be surprised to be asked for your bank statements. You may have concerns about what your mortgage lender is looking for or what your bank statements need to show.
Lenders use bank statements in several ways to understand your financial situation and to assess the overall risk of lending money to you. There are certain factors you should be aware of with your bank statements and pitfalls to avoid. Let’s explore mortgage applications and bank statements in detail.
Why Are Bank Statements Needed for a Mortgage Application?
A mortgage is a serious financial commitment and, for most people, it is the single biggest financial decision they will make in their lives. When lenders assess a mortgage application they want to have as much information about your personal circumstances as possible. This ranges from details about your income which is evidenced with payslips and your day-to-day spending.
Bank statements allow lenders to scrutinise your daily spending habits and assess several areas. Predominantly a lender will be looking at:
- Daily expenditure
- Whether you are using an overdraft facility
- If there are undisclosed debts
- If you have undisclosed financial commitments
To do this, lenders request three months’ bank statements typically, although you may find your lender wants to see further back and request additional months. A lender will normally ask for more bank statements if there is something uncertain in the bank statements you have provided, such as a large payment to a third party.
Can Bank Statements Affect a Mortgage Application?
Yes, bank statements can affect your mortgage application. Primarily, if there is an issue with your bank statements a lender may decline the application.
The good news is, the factors lenders look for can be corrected with a bit of work and even if you are declined with one lender, another lender might be more flexible and allow you to obtain a mortgage.
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What Do Lenders Look for in Bank Statements?
We have discussed the four main areas that lenders are concerned with when assessing your bank statements. Below we outline those factors in more detail.
Your daily expenditure will be a significant factor for lenders. They will look at how much you are spending each day and ensure you are living within your means. Lenders will also look for areas of problem activity. For example, if you regularly use betting or gambling websites or if you spend significant amounts online.
Essentially, the lender is looking for areas in your life that could present a problem with you repaying your mortgage. Gambling addiction is unfortunately common in the UK and a lender will be reluctant to lend if they feel you have a problem with gambling.
Overdraft Facility and Usage
Having an overdraft facility on your account is not problematic. However using that overdraft facility signals to a lender that you are unable to live within your financial means. If you regularly use an overdraft facility this will almost certainly cause a problem with most lenders.
A lender will expect you not to be using your overdraft facility on a regular basis and if they are unsure about your overdraft usage, they may request additional bank statements to view further back into your financial past. In order to mitigate this problem, it is best to repay your overdraft in full and not use it prior to making a mortgage application.
A credit check will show most debts, but you may notice that different credit reference agencies display different financial information for you. A lender will look for regular payments to companies that do not show up on your credit record. If an undisclosed debt is found a lender will adjust your affordability calculation to reflect the new debt. They may also decline your mortgage application if the undisclosed debt prevents you from borrowing the amount of money you need.
Undisclosed Financial Commitments
An undisclosed financial commitment would be a payment outside of what is considered a traditional debt. For example, spousal support or child maintenance payments would be an additional financial commitment. Like debts, undisclosed financial commitments are treated in the same way and can reduce your affordability calculation or cause the application to decline altogether.
How Many Months Banks Statements Will I Need?
Most lenders will request three months’ bank statements when you submit your mortgage application. There are circumstances or specialised mortgages where a lender may ask for more bank statements up front.
If your initial three months’ bank statements are insufficient for the lender to decide, they will request more bank statements. Lenders typically ask for an additional three months’ bank statements and in rare cases may ask to see your bank statements over the last twelve months.
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Can I Be Declined Because of Bank Statements?
Yes, as mentioned there are numerous reasons why bank statements can cause your mortgage application to decline. In general, lenders look to be as flexible as possible when assessing your bank statements but there is a limit to this flexibility.
If there is a problematic area in your bank statements that cross a lender’s red line such as excessive gambling, they may decline the application immediately. If you are declined, you may not be told why by the lender. If you use a mortgage broker, they will be able to discuss the situation with the underwriter working on your case and pin down the exact reason for a decline.
When you apply directly to a lender they may decline and say your bank statements fell outside of their lending criteria with little more information provided.
Speak to a Specialist
A mortgage broker will look over your bank statements before submitting a mortgage application and ensure they meet a lender’s criteria. They will also be able to advise you how you can improve your spending habits to meet a lender’s criteria if you are struggling. Whether you’re looking to buy your first house or remortgaging, we can help you find the right mortgage. Contact us today to book your mortgage consultation.