This is one the most common questions we get from our clients “What do lenders look for when they assess my bank statements?”. Because we get this question so much, we thought we would put together this blog to explain the key reasons lenders assess your bank statements to let you know why and to put you at ease. 

 

Most mortgage applications are declined due to things found on bank statements, not because of credit file issues or valuations but because of what lenders see on bank statements that either don’t match the picture put forward to the lender on the application or undisclosed spending alters the cases affordability. 

 

To put it plainly, your payslips or your self-assessments show your income. Your credit report shows your committed expenditure such as credit cards and loans etc, but your bank statements show your other regular spending. Regular spending such as nursery or school fees, overdraft usage and gambling which may not have been disclosed on the mortgage application. 

 

So, what sort of things on your bank statements can alter the affordability or strength of a mortgage application? 

 

The first and main reason lenders require bank statements to support your mortgage applications is to check that the pay you receive in your bank matches what is on your payslips. Payslips are the easiest document to forge but you cannot forge the amount you receive in your bank account, so both need to match. The net figure on your payslip should exactly match the amount received in your bank account on the date reflected on the payslip. 

 

Mortgage affordability can reduce after a lender’s underwriter reviews your bank statements if they pick up undisclosed expenditure that wasn’t disclosed on the application. The expenditure we are talking about is overdraft usage which doesn’t show up on a credit report, regular monthly expenses such as nursery/school fees, direct debits to friends and family members to repay private debts and regular gambling. Although not consider committed expenditure (Committed expenditure is classified as monthly expenses you have to pay whether you feel like it or not, committed by contract cush as a personal loan for example), regular monthly expenses such as nursery fees will be factored into affordability as you need to pay these regularly as part of your lifestyle.  

Gambling debts are seen as relative to your income. If you bring home £2,000 per month and gamble £20 per week on the football that should be fine. But if you are gambling £20 per day that could be seen as too regular and considered an expense which would impact your affordability. 

Not all lenders require bank statements as part of the application process but the ones that do typically require either the latest bank statement or the latest 3 months of bank statements. The request for bank statements depends on the type of case and what income you receive. For example, if you receive variable income such as overtime, bonuses or commissions lenders may want to see bank statements to see the amount declared on your payslips matches the amount received on your bank statements.  

 

Also, if you require any form of benefit income, your bank statement will evidence that incoming being received. These benefits include child benefit, universal credit, maintenance from a partner and PIP etc. 

 

Lenders may request 3 months bank statements to check a more extensive period to gain a more accurate picture of your spending habits over a longer period of time. This would allow lenders to take an average of your spending rather than a small snapshot from just one month. 

As we mentioned above, not all lenders require bank statements so those lenders could be seen as more lenient. Some lenders however, depending on the case type – if there is a lot of income sources or it is an adverse credit case they may want 3 months statements to verify the income and check spending habits to gain further confidence in the strength of your application. 

This question could be a full blog post in itself! There is a list of things that appear on a bank statement that can prompt further information from a lender or decline an application all together. The first is excessive gambling, regular deposits to gambling sites and large deposits (and a combination of both) can be seen as a committed expense which will be factored into your affordability assessment, or give the lender cause for concern that you may have difficulty repaying the mortgage in the long term if your gambling gets out of control. 

Another red flag on bank statements is unexplained bank transactions; this can be money going in or out of your account. At best this is small amounts which may go unnoticed and at worst they can be an indicator of potential money laundering or illegal activity. 

 

Bounced direct debits are the result of having insufficient funds in your account to cover a direct debit or withdrawal. This is an indicator to lenders of money mismanagement; this does not give lenders confidence that you can repay a mortgage if you fail to manage smaller direct debits which can cause the underwriter to decline your application. 

 

Excessive overdraft usage shows lenders a dependency on credit and possible money mismanagement. If a lender is going to lend you the largest amount of money you are likely to borrow in your life, they want to be certain you can repay the debt each month. By living in your overdraft this does not show to a lender that you will be able to do so. 

 

Worse than living in your overdraft is exceeding overdraft limit, this is leaning on more debt than agreed which will have financial penalties such as bank charges which will further increase the problem whilst indicating to lenders that you cannot manage money before taking on a mortgage. 

 

If you are thinking of applying for a mortgage soon and would like us to review your financial position (your income as well a your bank statements) before you apply for a mortgage then please contact us today.