Mistakes to avoid on your bank statements...
Posted on 6th September 2022 at 10:24
Applying for a mortgage is nerve-wracking. It feels like all your financial history is being laid bare and everything’s being picked through with a fine-toothed comb. You can’t help but wonder what lenders might find - and how it could affect your application.
And it’s true - there are some red flags that lenders might find in your bank statements that can affect the offer you get. But there aren’t too many of them, and if you plan a few months in advance you should be able to avoid most of them easily.
What are lenders looking for?
When you’re applying for a mortgage, your bank statements give lenders a snapshot of your financial health. They reveal your income, spending habits, and overall ability to manage your finances. Lenders use this information to decide if you’re a safe bet for a mortgage.
These are a few of the things that lenders really want to see evidence of.
Steady income
Lenders love to see a consistent income. If you have a regular pay packet from your employer that’s great - it shows that you have a stable job, and that immediately makes you a lower risk. If you’re self-employed they’ll want to see regular payments that show your business is bringing in steady income.
Sensible spending
Showing healthy spending habits is key to a good mortgage offer. No one expects you not to spend anything but lenders want to see that you’re living well within your means and your spending is under control.
Savings
Having some savings is a big plus for lenders. It shows you have something to fall back on if there are any unexpected expenses.
Overdraft use
Using your overdraft now and then is fine - that’s why it’s there. But if you use it often or heavily that might be a problem as it suggests you could be struggling to manage your money.
Debts and direct debits
Lenders will check your existing debts and regular payments. High levels of debt or lots of direct debits going out every month can make them wary about your ability to take on a mortgage.
Common bank statement problems - and what you can do about them
If you’re worried about your bank statements when you’re applying for a mortgage you’re in good company. Most people worry about what lenders are going to find. Here are a few of the most common red flags for lenders, and how you can tackle them.
Irregular income
If you don’t have a steady paycheck from a job - like if you’re freelance or work on commission - it can look like you don’t have a regular income. So, take some time to demonstrate that you do have the income you need to pay a mortgage. You might need to go back a few months extra, especially if your work is seasonal, but things like tax returns, business accounts and contracts can help show lenders that you’re a safe bet.
Big deposits
Having a big deposit for your house is great. Having big deposits into your bank account can be a problem. It can raise money-laundering flags, but it also just looks odd to lenders - even if it’s completely innocent. So if you’ve had big amounts of money paid into your account, be ready to explain what they are - whether it’s from selling something, a gift, or a bonus.
Gambling transactions
We’re often asked if gambling can affect a mortgage application. The answer is yes, it can. If lenders can see regular or high gambling transactions then that makes you look risky. Occasional small amounts might not be a problem, but if you’re gambling frequently or with large amounts of money that can significantly affect your application.
Multiple bank accounts
Having several bank accounts isn’t a problem in itself, but lenders will probably want to see statements for all of them. Make sure they all follow the same tips above and you should be fine.
Getting your bank statements mortgage-ready
If you’re planning to apply for a mortgage there are a few steps you can take to make sure you’re as attractive to lenders as possible. You might need a few months to get things in order, so make sure you plan well ahead of time.
Get your finances in order
Well before you apply - at least a few months, and ideally longer - start managing your finances really carefully. Cut down on unnecessary spending and make doubly sure that all your direct debits are paid in full and on time.
Cut back on overdraft use
Do your best to clear your overdraft if that’s possible - and if not, make sure that it’s kept to a minimum. A few months without dipping into your overdraft at all is a great signal for lenders.
Keep things consistent
Make sure you don’t open any new accounts, or close any old ones in the months before you apply for your mortgage. Lenders love to see stability as it helps them get a clear picture of your finances.
Build up savings
Make sure you save regularly, and not just for your house deposit. This shows lenders that you have good financial discipline and you also have a safety net for any unexpected costs.
Be ready to explain large transactions
If there have been any large transactions - either in or out - on your account, make sure you have all the documentation you need to explain them before you apply. It’s not necessarily a problem but a clear explanation will help reassure lenders that it’s nothing to worry about.
The biggest red flags
There are a few things that you really want to avoid on your bank statements when you’re applying for a mortgage. If you have any of these, make sure you sort them out before you apply for a mortgage - it’ll avoid a potential rejection, and help your credit rating in the long run.
Overdraft Issues
Like we said before, occasional overdraft use is fine. It’s meant to be a buffer. But if you’re constantly living in it that’s a big red flag for lenders and you could have your mortgage application rejected due to overdraft issues.
So, you need to pay it off. Put together a plan to pay off a little bit every month and you’ll be there before you know it. It might take some time, but it’ll be worth it in the end. You might need to cut down on your spending, or pay less into your savings - but it’s worth the effort.
Then, once you’ve cleared it and you’re not living on your overdraft, you need to show a few overdraft-free months. So stick to your plan, build up a buffer in your account and you’ll be good to go before you know it.
High debt
Having lots of debt is another red flag for lenders. So, make sure you work out a budget plan to pay as much of it off as possible before you apply for your mortgage. Don’t forget things like credit cards as well as loans.
Missed payments
Any kind of missed payments are a big no-no. If lenders see you can’t pay your phone bill why would they believe you can pay your mortgage? So make sure everything - including all your bills, your credit cards and any loans - is up-to-date and has been for a good few months before you apply.
Low balances
Make sure you keep a healthy balance in your bank accounts. If you’re emptying your account every month that looks to lenders like you’re living paycheck to paycheck, and that won’t make them confident in your ability to manage a mortgage.
Wrapping Up
Your bank statements are really important in your mortgage application. That’s why it’s so important to know what lenders want to see, and what kind of things are likely to cause a problem.
The key is to make sure your finances are in good shape a few months before you apply for your mortgage, so lenders can see that you’re well on top of managing your money. Remember that mortgage lenders want to give you a mortgage - that’s how they make money - you just have to show them that you’re not a big risk.
If you’re not sure whether your bank statements are good enough to apply for a mortgage, or about any other part of the mortgage process, the best thing you can do is speak to an independent mortgage advisor. They’ll be able to give you the advice you need to get the new home you want.
And not to blow our own trumpet, but if you’re in the Hull and East Yorkshire area you could do a lot worse than having a chat with us at Green & Green. We know our stuff and we’ll be happy to help.
Tagged as: Bank Statements, Mortgages
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