What Lenders Look for on a Bank Statement: A Guide for Homebuyers

Ready to land that mortgage? Your bank statements are key! Whether you're a first-time buyer or a property pro, knowing what lenders look for can make all the difference. Here's how to get your finances in tip-top shape for a smooth homebuying journey.

 

Why Do Lenders Check Bank Statements?

Before offering you a mortgage, lenders need to assess your ability to repay it. A bank statement provides a transparent view of your income, spending habits, and overall financial health. They give insight into your financial behaviours, helping lenders determine if you're a responsible borrower.

 

How Many Months of Bank Statements Are Required?

Typically, UK lenders will ask for between 3 to 6 months of bank statements. These need to include all your regular income and outgoings, giving the lender a clear view of your day-to-day finances.

 

What Lenders Are Looking For

• Proof of Income: The first thing lenders want to confirm is your income. Your salary deposits, freelance earnings, or any other regular income streams must match the information you've provided in your application. This is particularly important if you're self-employed, where consistency in earnings plays a key role.

• Stable and Consistent Spending Habits: Lenders are looking for financial responsibility. They want to see that you manage your money well and avoid erratic spending patterns. Regular, necessary expenses like groceries, bills, and transport are expected, but large, frequent purchases or unpredictable spending habits might raise red flags.

• Regular Bill Payments: Lenders will closely examine your ability to make payments on time, such as rent, credit cards, loans, or utility bills. Missing payments or frequent overdraft use could suggest you struggle with managing your finances, which may lead lenders to view your application as riskier.

• Savings and Financial Cushion: If you have a history of saving, this works in your favour. It demonstrates your ability to manage money wisely and shows you have a financial cushion to fall back on in emergencies. Many lenders like to see that you have enough in savings to cover at least three months of living expenses in your bank statment.

• Existing Financial Commitments: If you're already making regular payments on credit cards, loans, or other debt, lenders will check how much of your income is being used to cover these obligations. High levels of debt may limit the amount you can borrow, as lenders need to be sure that taking on a mortgage won't overstretch your finances.

• Unexplained Payments or Transfers: Large, unaccounted-for deposits or transfers may raise questions. Lenders might ask you to clarify the source of significant funds, such as gifts or loans from family, to ensure they're legitimate and won't need to be repaid under unforeseen circumstances.

 

Red Flags That Can Impact Your Application

Certain factors could hinder your mortgage application, and it’s essential to be aware of them in advance:

• Frequent Overdraft Use: Regularly dipping into your overdraft suggests you may be struggling to manage your income. A lender might consider this a sign of financial instability.

• Gambling Transactions: While occasional gambling may not necessarily disqualify you, frequent or large betting activity could be seen as irresponsible, negatively impacting your application.

• Unpaid Debts or Bounced Payments: Missed payments or direct debits that have bounced are serious red flags for lenders. They might indicate you have trouble keeping up with your financial commitments, which could make you a risky borrower.

Preparing Your Bank Statement for a Mortgage Application

To put your best financial foot forward, it’s worth taking a few simple steps before submitting your bank statements:

• Cut Back on Unnecessary Spending: In the months leading up to your application, it’s a good idea to cut down on non-essential purchases and try to save as much as possible. This will demonstrate financial prudence.

• Clear Outstanding Debt Where Possible: If you have existing debt that you can pay off, doing so may improve your chances of securing a mortgage. It will reduce your debt-to-income ratio, making you a more attractive applicant.

• Ensure Your Income Is Clearly Documented: Make sure that all sources of income, whether from employment, freelancing, or rental income, are clearly shown on your bank statements. If any income is irregular, be ready to explain it.

• Avoid Large, Unexplained Transactions: Try to avoid making large cash deposits or transfers without a clear paper trail. If you do receive a gift or bonus, keep a record of where it came from and be prepared to explain it to the lender.

• Organise Your Financial Documents: Lenders will likely ask for other documents in addition to bank statements, such as payslips, P60s, and identification. Having these documents ready will make the process more straightforward.

• Silly transaction references: Everybody loves a joke however your transaction references will be reviewed by a lender. If you send someone money or someone sends you money try to keep these to a minimum and please don’t state them as anything illegal. I’ve seen transactions such as “big dildo” and “cocaine” the former probably won’t cause an issue, the latter may well do.

 

Final Thoughts with Klink

Your bank statement is a window into your financial life, and lenders will use it to assess your suitability for a mortgage. By maintaining responsible spending habits, managing your debts, and ensuring you have enough savings, you can improve your chances of being seen as a reliable borrower.

Preparing your finances ahead of time not only makes the mortgage application smoother but also increases your likelihood of securing the best possible deal. After all, buying a home is a huge commitment, and showing lenders you are financially stable is key to unlocking the doors to your new home.

By understanding what lenders look for and making sure your financial health is in top shape, you’ll be one step closer to getting the keys to your dream property. For more information on home-buying, financial wellness, and mortgage readiness, download the Klink App.