There is a multitude of factors that can impact your mortgage application. From your income, which is one of the biggest indicators of how much you can borrow, to your history of borrowing and repaying money or in other words your credit score. Things such as your spending habits, savings, and other financial commitments also help the lender paint a picture of your reliability as a borrower and can impact your application, interest rate, and even whether you may or may not be eligible for a mortgage.
Every borrower must be approved by a lender in order to secure a mortgage. This is why when intending to buy a new property, it is normally recommended that you not only get your deposit in check, but also your bank statements, and credit score to ensure an easy and problem-free sale.
Some of the biggest red flags for Mortgage lenders include:
- Large amounts of money deposited into your account without a clearly documented source
- Bounced checks or non-sufficient fund feeds
- Regular payments to a non disclosed credit account
- Too high debt-to-income ratio
- Last-minute purchases
How far back is your bank account looked at?
During the home buying process, lenders will typically look at up to three months of recent bank statements. You will need to be able to provide bank statements for all of your active bank accounts - including any saving accounts. That’s why when intending to purchase your property, it’s good to look through your bank accounts and make sure there are no unexplainable inconsistencies, as well as make sure to keep your spending habits under control to leave a good impression.
Your Bank statements will be used to:
- Verify any of your savings, as well as cash flow
- Check for unusual withdrawals, deposits or any other activity in your account
- Double-check you haven’t recently accumulated additional debt
This process may vary for those that are self-employed, who aim to qualify for a mortgage based on their bank statements, instead of tax returns. Freelancers or sole traders may have to provide up to 12-24 months' worth of bank statements, to help the lender get an idea of their cash flow over a prolonged period of time.
What underwriters look for on your bank statements
Your bank statements will be reviewed by someone called an underwriter on behalf of the lender. Underwriters are responsible for reviewing your employment details, and ensuring the information provided in your application is accurate and up to date. The process of underwriting can actually be defined as the process of taking on risk in a financial transaction. In this case, it’s the lender taking on the risk of lending you money.
Underwriters use a variety of sources of information to assess your attitude to credit, repayments and lifestyle. To figure out your creditworthiness underwriters will look at credit referencing checks, bank statements, and your financial history. Your bank statements will be cross-referenced alongside your application form, as well as potentially verified with your bank to ensure there are no inconsistencies.
All of this will help them paint an accurate picture of your financial situation and spending habits and help them determine the level of risk associated with giving you a mortgage. This is why it’s extremely important to provide accurate and exact information at every step of your mortgage journey. If you fail any cross-referencing checks, there is a possibility the lender will refuse to give you a mortgage.
Another major factor that underwriters look out for is large unexplained deposits made into or out of your bank account. If you have recently had any large sums of money transferred to your bank account, you will need to explain exactly where they have came from, and provide any proof that may be necessary.
Main things mortgage lenders don’t want to see
There are certain risk factors lenders face during the mortgage process. To ensure risk is kept to a minimum, every applicant needs to meet a certain set of criteria to give lenders a level of reassurance that they will be able to make regular mortgage repayments. Here are the main five things that can ‘make or break’ your mortgage application, and that lenders certainly don’t want to see when you’re applying for a mortgage.
1. Undisclosed Credit
The way you repay any of your debt, credit cards or loans, contributes to your credit score - or a number that aims to represent your ability to effectively deal with credit and make repayments on time. If you are currently paying off a balance on your credit card, the underwriter assessing your application will be able to clearly distinguish where your monthly payments are going, and assess your creditworthiness, giving them transparency over your spending habits.
Certain creditors, however, don’t report to the major credit bureaus. This particularly applies to any loans you may have got from an individual, for example, a business loan from an investor or a business angel. The automatic monthly payment you may have set up, will then alert the lender of a non-disclosed credit account.
As any payments you may have previously missed, will not be reflected on your credit score, giving the lender reduced transparency over your actual spending habits and ability to repay debts. This can be a cause for concern for the lender, so make sure that all of your credit accounts are clearly disclosed or well documented.
2. Non-sufficient fund fees
If your account has a history of regular NSF charges, it is likely to define you as someone who has a poor ability to make regular payments in the eyes of the lender. NSF or non-sufficient-funds charges are charged to your account as a penalty for not meeting your payment deadlines.
These can be insufficient fund charges made by your bank if you have a track history of not making your direct debit payments on time, or charges from external companies such as your internet or phone provider, which will be charged on top of your original unpaid bill.
NSF charges indicate that your struggle to meet regular payments, and may therefore categorise you as a high-risk borrower.
3. Undocumented Deposits
Undocumented deposits can suggest to the lender that your money is coming from an unacceptable source. This can be tax-free earnings, or any additional savings or funds that belong to you that you may have been depositing into your account.
Once again, the most important thing to the underwriter is transparency - being able to truly understand how you handle your finances, and how much money you have at a certain point in time. If you have a history of large chunks of money being deposited into your account, you will need to explain and potentially submit documentation of it coming from a legal source.
Of course, the amount is what’s key. Plenty of us would have ‘random’ deposits made to our bank accounts, a friend paying us back for dinner, or a family member providing us with a financial gift to help out. What lenders are looking out for are large unexplained deposits.
Large deposits that would be flagged by the underwriter, exceed 50% of the total monthly qualifying income. If you can’t provide the relevant documentation showing where the money has come from, the lender might disregard the funds and use whatever is left to qualify you for your mortgage.
4. Recently accumulated debt
Taking out a large loan or maxing out your credit card balance can have negative implications on your mortgage application. Seeing that the lender’s main priority is to ensure that you are a reliable borrower, falling into extra debt right before your mortgage application can be suggestive of existing financial issues.
A couple of recent small purchases on your credit card should not be an issue, however, if you have taken out a significant loan or used up over 30% of the balance available on your credit card it gives the lender a cause for concern.
5. Poor credit score
Your credit score is what reflects your creditworthiness to the lender. Normally a number anywhere from 0 to 999, depending on the credit scoring agency. It takes into account any existing debt you may have, and summarises your ability to repay it on time.
Missing payments or using your credit cards for day-to-day purchases, withdrawing money, or holding them close to their limit will bring your credit score down. A low credit score can not only suggest your lack of ability to make repayments on time, but also poor financial habits and is therefore likely to affect your application negatively.