An underwriter or lender examining bank statements for mortgages is a big step on the path towards being approved for a mortgage during the home-buying process.
This can be a stressful time, making yourself as appealing as possible to the lender to be seen as eligible for a mortgage.
To break down this approval process and make it less intimidating, Finance Rate explores the three key things a lender doesn’t want to see on an applicant’s bank statement, as well as a few key things they do want to see – so you can give yourself the best chance you can at a mortgage and get one step closer to home ownership. Let’s get started!
Bank statements for mortgages – what lenders don’t want to see
Red flags for mortgage underwriters include the following:
- Bounced checks or insufficient funds
- Large deposits without a clear source
- Monthly payments to an individual or undisclosed credit account
When reviewing your bank statements, mortgage underwriters in the UK are skilled at identifying sources of funds that are not deemed acceptable, undisclosed debts, and instances of financial mismanagement. If red flags like these crop up in your bank statements and the underwriter notices, they can require a lengthy explanation.
Here are three items on your bank statements that might turn up a red flag for a financial institution:
1 – Declined payments
When applying for a mortgage, the presence of bounced cheques and declined payments on a bank statement can raise concerns for lenders and potentially affect your ability to secure a mortgage loan.
These issues can reflect negatively on your financial stability and management, which lenders carefully assess to determine whether you’re a suitable candidate for a mortgage.
Declined payments indicate that you might not have sufficient funds in your current account to cover your financial obligations. This can be a red flag for lenders, as it suggests a lack of financial responsibility and the potential for financial difficulties in the future.
Mortgage lenders want to ensure that you can comfortably afford the mortgage payments along with your other financial commitments. Frequent declined payments indicate that you might be struggling to manage your existing debts and obligations, which could raise concerns about your ability to handle the additional responsibility of a mortgage.
2 – Large, undocumented deposits
Outsized or irregular bank deposits might indicate that your down payment or closing costs are coming from an unacceptable source. A large deposit could indicate an illegal gift. A home buyer can’t take help from a party who stands to gain from the transaction — like the home seller or real estate agent.
If you’re unable to provide documented evidence that the source of a significant deposit aligns with the programme’s guidelines, the lender must ignore the funds and utilise whatever remains to determine your eligibility for the loan.
Should the confirmed funds not meet the requirements for loan qualification, you’ll need to set aside another sum of money from an acceptable source.
3 – Regular payments, irregular activities
Be cautious if you notice a monthly payment that doesn’t match up with any credit account you’ve declared on your application.
Usually, your credit report compiles information from sources like credit cards, auto loans, student loans, and other outstanding debts. Yet, certain creditors may choose not to share data with the major credit bureaus.
For example, if you obtained a personal loan or business loan from an individual rather than a formal financial institution, those specific debt records might not be included in your credit report.
Nevertheless, a recurring monthly automatic payment listed on your bank statement is likely to draw the lender’s attention to an undisclosed credit account.
What lenders do want to see on your bank statements
The underwriter — the person who evaluates and approves mortgage applications — will look for four key things on your bank statements:
- Enough cash saved up for the down payment and closing costs
- The source of your down payment, which must be acceptable under the lender’s guidelines
- Enough cash flow or savings to make monthly mortgage payments
- Cash reserves, which are extra funds available in case of an emergency
An underwriter generally wants to see where your money came from and any unusual deposits are explained in writing.
They also want an explanation for large deposits, to see that funds have been in your account for at least 60 days and are shown on the two months’ bank statements you’re required to provide.
Bank statements also show underwriters that you haven’t opened any credit accounts or created new debt before securing the mortgage.
Helping you see what lenders look for in bank statements for mortgages
When you apply for a mortgage, underwriters use bank statements to verify that you can afford the down payment, closing costs, and future mortgage payments.
The more straightforward your application file, the more likely you’ll be approved. Even if unintentionally, you certainly don’t want to raise any red flags. The red flags mentioned here are not definitive indicators of a negative situation, but they might trigger further scrutiny and requests for explanations from mortgage underwriters.
It’s essential to maintain clear and transparent financial records and be prepared to provide documentation and explanations if any of these red flags are present on your bank statements.
Finance Rate is here to help you learn about what lenders don’t want to see in your bank statement. This way you can avoid common underwriting pitfalls and optimise your chances of mortgage approval. We’re here to help break down other financial quandaries too, feel free to browse our other topics, like pensions or breakdown cover.