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Guide to Understanding What Lenders Look for on Your Bank Statements

This guide was last updated 9 August 2024

When applying for a mortgage, lenders scrutinise your bank statements as part of their assessment process. Understanding what they look for can help you prepare your financial profile and improve your chances of securing a mortgage. Here’s a comprehensive guide to what lenders typically examine on your bank statements.

1. Income Verification

Regular Payments

Lenders want to ensure that you have a stable and sufficient income to meet mortgage payments. They will look for regular deposits that align with your stated salary or income source. This includes:

  • Salary payments from your employer.
  • Income from self-employment.
  • Rental income.
  • Any other consistent sources of income.

Bonuses and Overtime

If you receive bonuses or overtime pay, lenders will assess the frequency and consistency of these payments. They often prefer regular income, but consistent bonuses and overtime can positively impact your application.

2. Expenditure Patterns

Essential Expenses

Lenders will examine your essential monthly outgoings, such as:

  • Rent or existing mortgage payments.
  • Utility bills (electricity, water, gas).
  • Groceries and household supplies.
  • Transportation costs (fuel, public transport).

Discretionary Spending

Your discretionary spending (e.g., dining out, entertainment, and holidays) will also be assessed to understand your financial habits and remaining disposable income.

3. Committed Expenditures

Debt Repayments

Any existing debt repayments, such as:

  • Credit card payments.
  • Personal loans.
  • Car finance agreements.

Lenders will calculate your debt-to-income ratio to ensure you can manage additional mortgage payments.

What is a Debt-to-Income Ratio?

The debt-to-income (DTI) ratio is a key financial measure for mortgage lenders, comparing a borrower’s total monthly debt payments to their gross monthly income. It’s calculated by dividing monthly debt payments by gross monthly income and multiplying by 100. For instance, if you pay £1,500 in debt each month and earn £4,000 before taxes, your DTI ratio is 37.5%. This ratio helps lenders see if you can handle additional debt.

Lenders use the DTI ratio to assess risk and determine how much you can afford to borrow. A lower DTI ratio means you’re less risky and more likely to get better loan terms, including lower interest rates. Typically, a DTI below 36% is good, though some lenders accept up to 43%. This ensures you don’t take on more debt than you can handle, reducing the chances of default.
Understanding your DTI ratio is also important for your financial health. It shows how much of your income goes towards paying debts and can alert you when it’s time to cut down on borrowing. For UK borrowers, keeping a healthy DTI ratio not only boosts mortgage approval chances but also helps maintain long-term financial stability.

Subscriptions and Regular Payments

Regular payments for subscriptions (e.g., gym memberships, streaming services) and insurance policies will be noted.

4. Financial Conduct

Account Conduct

Lenders assess how you manage your account. Key indicators include:

  • Overdraft usage: Frequent or excessive overdraft use may signal financial instability.
  • Returned payments: Any instances of returned or bounced payments can negatively impact your application.

Savings Habits

Having a healthy savings balance and regular contributions to a savings account demonstrates financial discipline and can strengthen your application.

5. Unusual Transactions

Large Deposits and Withdrawals

Unexplained large deposits or withdrawals may raise questions. Lenders will require explanations for significant transactions to ensure they are legitimate and not indicative of financial instability or irregular income sources.

Gambling Transactions

Regular gambling transactions can be a red flag, indicating potential financial risk and instability. Occasional small amounts are usually acceptable, but frequent or large gambling expenses can negatively affect your application.

How a £10 bet on the Grand National could cost you your mortgage

6. Bank Statement Period

Standard Review Period

Lenders typically review bank statements from the past three to six months. This period provides a comprehensive overview of your financial behaviour and income stability. If asked for them, you should make sure that the latest three months are covered with no gaps or missing pages.

Consistency Over Time

Consistency in income and expenditure over the review period is crucial. Significant fluctuations can raise concerns about financial stability and predictability.

Conclusion

By understanding what lenders look for on your bank statements, you can better prepare your finances and increase your chances of mortgage approval. Maintain stable income, manage your expenditures, and avoid financial red flags to present yourself as a reliable borrower.

For a friendly chat with one of our down-to-earth mortgage experts please call us on 020 7220 5110 or send us a message.

Your home may be repossessed if you do not keep up repayments on your mortgage.

There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.

Andrew Montlake

Written by Andrew Montlake

Andrew Montlake, better known as Monty, began his journey with an Hons degree in Economics & Politics before starting in the mortgage industry in February 1994. As a main founder of Coreco in 2009, he successfully grew the brand, marketing, and communications, and was made MD in 2019 focussing on the overall vision, strategy, and culture of the company. As Coreco’s media spokesperson, Andrew can often be seen or heard on TV and radio as well as regularly commenting in the national, local, and trade press. He is the author of this acclaimed Mortgage Blog and is well-known for his social media, podcasts, and public speaking. Andrew is now proud to serve as Chairman of the Association of Mortgage Intermediaries, (AMI) as a cheerleader for the Mortgage Industry as a whole and continues to work at the coal face, writing mortgage business and advising clients.

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