Are you looking to apply for a mortgage and wondering why lenders require your bank statements as part of the application process? Taking out a mortgage is one of the biggest financial decisions you will ever make in your life, so it’s important to understand all aspects involved.
In this article we’ll cover exactly why UK mortgage companies need to see bank statements before issuing a new loan – breaking down the reasons behind the requirement step-by-step.
Why is a mortgage lender interested in my bank account?
Well, the answer is simple.
Your bank account can give them a better idea of your overall financial situation, which is a key factor in determining whether or not you are eligible for a mortgage. By taking a look at your account, your lender can see your income and spending habits, which can help them determine how much they are willing to lend you and at what interest rate.
You regular monthly outgoings will affect how much you could borrow as well as how much you can afford each month. Car finance payments are generally quite hefty and can affect your mortgage.
So while it may seem a real hassle, your bank account is actually a crucial piece of the mortgage puzzle.
How many bank statements do you need?
When applying for a mortgage, there are many documents that lenders typically require. One of these documents is your bank statements.
But how many months’ worth do you need to provide?
Well, the answer to that question really depends on the lender’s requirements. Some lenders may only ask for the most recent three months’ of bank statements, while others may ask for six months’ worth or more. It’s important to gather all of the required documents before applying for a mortgage to avoid any delays in the process.
Statements are almost always needed for first-time buyers, self-employed and CIS workers. If you need to borrow money into your retirement years (65+), then the lender will ask to see your bank statements plus information about the pension/s you are likely to receive.
So, be sure to check with your broker to find out the specific requirements for bank statements.
How is a CIS mortgage calculated?
What will lenders look for?
Lenders will typically request your bank statements to assess your financial health and potential risk as a borrower. They will review your account activity, including your income, expenses, and spending habits. Lenders look for consistency in your income and expenses, so they can determine your ability to keep up with the mortgage payments (mortgage affordability).
It also enables them to check what income you have stated on the application form, against the amounts going into your current account. They will also look out for any large expenditures or sudden changes in your account activity that may raise suspicion.
How you manage the money going through your account gives the bank a good idea about your ability to budget and handle your finances.
Can bank statements affect applying for a mortgage?
It’s important to recognise that your bank statements could play a significant role in the outcome.
Lenders scrutinise your spending habits as a way to gauge your ability to repay the loan. Excessive or frivolous spending, such as extravagant holidays or frequent eating out or food deliveries, could signal to the lender that you’re a risky borrower.
Equally, incurring high bank charges each month, by exceeding your overdraft, or having insufficient funds when payments are due, will cause the underwriter some concern.
In these examples, the lender may reject the application altogether or offer a lower mortgage than what you originally applied for. It’s essential to be mindful of your spending before and during the mortgage application process to avoid any unnecessary setbacks.
Things to look out for on your bank statements that may result in a rejection
When it comes to your bank statements, there are certain issues that could potentially lead to a rejection of your application. It’s important to keep a keen eye on the following five things, which could be seen as red flags by lenders.
Firstly, any instances of exceeding overdraft limits could indicate to a bank that you’re unable to manage your finances effectively, which might make them question your ability to make repayments. Secondly, rejected direct debits can also indicate a lack of financial responsibility, particularly if they’re for a high value amount or appear too frequently.
Thirdly, frequent gambling transactions can raise concerns about your financial stability, particularly if you’re regularly using borrowed money to gamble. Fourthly, any use of payday loans will cause your lender to wonder if you are overspending.
Finally, an unusually high amount of cash withdrawals could also be seen as a warning sign, particularly if they’re for a large sum or occurring regularly.
Will gambling payments affect my chances?
Gambling is a popular pastime for many individuals, but it can have a negative impact on your finances, particularly when it comes to getting a mortgage. Lenders will assess your financial stability before approving your mortgage application, and frequent gambling payments may signal a lack of financial responsibility.
While one or two modest gambling transactions are unlikely to impact your application, continuous payments will raise concerns amongst lenders. If you’re looking to apply for a mortgage in the near future, it may be best to avoid excessive gambling and to demonstrate responsible financial behaviour.
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What if I don’t have enough bank statements?
It’s a common worry – what if you don’t have enough bank statements? Whether you’re applying for a loan, a credit card, or just trying to keep track of your finances, it can be frustrating when it seems like you don’t have all the information you need.
But the good news is that there are solutions! Depending on your situation, you might be able to get copies of your statements from your bank or access them online. You could also consider reaching out to the lender you’re applying to and asking about alternative documentation options. It might take a little extra effort, but don’t let a lack of bank statements hold you back from achieving your financial goals.
How do I submit my bank statements to the lender?
When working with a mortgage broker it is common for them to handle this step.
You may have initially emailed pdf statements to your broker, or perhaps sent them original statements in the post.
Make sure that all of the requested statements are legible, with all of the pages. When working with online statements many lenders have specific requirements to avoid being given fraudulent documents, so its a good idea to check this out.
Once they have all been checked and collated your broker will send them to the lender electronically.
How do I improve my chances of approval?
Your chances of approval can be improved by staying on top of your finances and demonstrating financial responsibility in the previous few months. So there is an element of forward planning needed so you can be mortgage ready.
If you intend on applying for a new mortgage in the next 3-6 months then now is the time to concentrate on cleaning up your bank account.
This includes avoiding any large purchases prior to the application process, such as holidays or cars, and building up some degree of savings to show lenders that you are prepared for unexpected expenses.
Additionally, keeping track of your budget and limiting unnecessary spending will help show that you have a good handle on your finances.
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