When you are applying for a mortgage, you may be asked to supply your bank statements as part of the application process. This is common for self-employed applicants as well as salaried employees. While this may seem daunting, it’s an essential part of the mortgage process.
A mortgage underwriter will examine these statements and use the information to help inform their decision to grant you a mortgage. If you’re getting ready to apply for a mortgage and want to make sure your application is in the best possible shape, you may want to keep an eye on your spending.
What is an underwriter?
Mortgage underwriting is the process used by banks to determine how much of a risk it will be to lend money to an applicant. If you have a steady income, responsible finances and pay your bills on time, this will look a lot better than someone who is in debt and persistently late with their payments.
The underwriting process is all about deciding if the risk of lending to you is worth the reward (the interest you pay). It might not be a fun subject, but you need to understand this before going forward with an application.
Why do they look at your bank statements?
Lenders look at your bank statements as these are a window into your finances. It helps them to see patterns in your spending, your level of fiscal responsibility and helps to confirm if your income is what you’ve said it is.
If you have told the bank your monthly expenses are much lower than they actually are, your bank statements could be used to dispute this. This is why it’s important to be honest and accurate in your financial disclosures in the earlier stages of your application.
Trying to reduce your monthly expenses to be able to borrow more money will backfire unless you can show that you have actually reduced your monthly expenses.
What do mortgage underwriters look for?
- Proof of income. The first thing a lender will look for is a regular source of income. If possible, this should arrive in your bank on the same day each month and it should be the same amount. While you might think an increase in income is a good thing, fluctuating income is seen as a sign of financial instability. This is particularly true for the self-employed who may have different income levels every month.
- Regular savings. Transferring money to a savings account can also make you look like a responsible borrower. However, dipping into your savings for small amounts could have the opposite impact.
- Responsible overdraft use. An overdraft is considered a good thing, provided you are using it correctly. Your salary should bring you above your overdraft every month, and you should never exceed your agreed amount. Bank charges outside of your overdraft interest could be considered a bad thing.
What are the common red flags?
These are just some of the things lenders may consider to be poor spending habits. If possible, you should avoid the following:
- Gambling sites. There have been cases where lenders have rejected applications because an applicant has too many gambling-related transactions on their bank statements. Gambling websites are an obvious red flag, as it could show an out-of-control gambling habit.
- Regular borrowing. They will also look for other sources of income. If you regularly receive cash gifts from an unspecified source, such as your parents, this could hint that you are financially irresponsible and often need to be bailed out. This is why managing your income and expenses is vital in the months running up to a mortgage application.
- Have you accurately represented your spending habits? If you’ve stated on your application that your entertainment expenses are just £50 a month, but the lender can clearly see that you are spending more than £300 a month on entertainment, this could bring your application into question. Make sure you are accurate in your representation of your spending habits.
What can I do to improve my bank statements?
When you are getting close to applying for a mortgage, it’s time to start thinking about getting your bank statements in shape. You will likely be asked for 3 months of statements, so you need 3 months to prepare. If you want help getting your finances in order, working with a mortgage broker through Niche Mortgage Info can help.
During this time, do the following to keep your spending in check:
- Avoid gambling websites, even for withdrawals. You don’t want any gambling websites to appear on your bank statements at all.
- Stay within your overdraft limit. If possible, don’t dip into it at all.
- Avoid borrowing money for any reason. If a friend or family member owes you money, get it in cash or ask them to wait to return it.
- Make all payments on time to avoid late payment fees.
- Make sure you always have enough money to cover your bills so you don’t have any payment reversals due to insufficient funds.