Making your first application to the bank for some funds, whether it be a mortgage for a house or a loan to cover a large expense, can be one of the most nerve-wracking times in a person’s life. Whilst you should already know which specific details your bank will need from you to process an application – the most important details are arguably the bank statements you must provide – you may not yet know what exactly they’re looking for.
In this article, we’ll give you an overview of what banks look for in the information you supply them as part of any applications. These reasons include having a proven ability to repay debtors, your general affordability, whether you have a stable income, whether your spending habits are manageable, and the sources of your deposit funds.
Banks look for a proven ability to repay debt
You may be aware that a common recommendation made to any young person setting out in life is that having a credit card to make big payments on, and paying it off in full every month, helps to build your credit score and prove to any future lenders that you can both borrow money sensibly and repay them quickly and fully.
This is especially important when it comes to making an application to the bank for a larger sum of money than is ever offered on a credit card. As mortgages and loans can be extremely large figures, any applicant who has a history of repaying credit card debt in full every month is much more likely to be accepted quickly than someone who’s never had a credit card.
However, there is a caveat to this, too: you must pay off the balance of your credit card every month. Not only do the fees begin to add up very quickly, but banks can use this as evidence that you do not repay your debt. In this instance, it is better not to have a credit card than for a bank to use slow repayments against you when it comes to applying for a mortgage or a loan.
You must prove your affordability to the bank
Any lender will use a specific debt-to-income ratio (DTI) to assess affordability. This is because they have a necessity to ensure that your monthly income comfortably covers any new repayments alongside your current financial commitments, which include your utility bills and local taxes.
This is one very prominent reason as to why it is highly recommended that any applicant should assess their own income and monthly expenditure before putting forward their own application: you must know how much money you already have leftover each month and your general affordability before you try to take on a large new repayment scheme. If you are not certain that you are living comfortably in the current circumstances, you may find yourself barely scraping by if your application for a loan or mortgage is accepted. This is because the repayments of any large sum can be quite overwhelming, especially at first.
On a similar note, the bank will always look at the stability of your income: are you paid the same sum every week or month, do you receive regular payments, and are you currently in receipt of a salary? To prove your income, banks look specifically at your pay stubs or tax returns and compare them to your bank statements. You must have a consistent salary or regular business profits for any such loan or mortgage application to be accepted by a bank.
Lenders look at your bank statements for red flags
When it comes to assessing affordability, banks also look for whether an applicant has manageable spending habits, with no red flags. Whilst lenders aren’t specifically looking at how many times you go grocery shopping, what they are looking for is the consistency of your transactions: it is absolutely normal for people to go grocery shopping regularly, but it is less normal to only pay for groceries once every six weeks, for example.
This is also where your utilities come into play. Banks are checking to make sure that you have these paid regularly because they make up a large part of your general affordability. Irregularly paying your utilities would demonstrate to a lender that you do not have the funds to afford your regular payments, let alone any larger payment plans that would come with a loan or a mortgage.
Red flags that banks are looking for include evidence of excessive gambling, large unexplained deposits that may not appear to have been earned through your salary and savings, as well as usage of any payday loan services, since these would also demonstrate low/no affordability. Another such service to be careful about using is Klarna, as banks will also see this as a potential red flag if you were misusing a service like this, as it could be misconstrued that you are unable to manage your spending sensibly.
Talking of avoiding large and unexplained deposits, banks are also using your statements to provide proof that your deposit was earned legitimately, often through savings, instead of being loaned to you. One way this works in your favour is if you routinely portion off a part of each monthly/weekly salary into your savings. If a lender can review that you have consistently been saving a percentage of your salary into an account, which may ultimately become your deposit in full, then they can assess that you have strong affordability and a good set of spending and saving habits.
Small changes can lead to big wins
Now that you have all the knowledge you need about what banks look for in applications, you can begin to make some sensible, small changes to your spending and saving habits. Most people only need to make relatively few alterations to their lifestyles to begin curating their financial accounts, ready for a mortgage or loan application. It can be as simple as deciding that now is the right time to open a credit card to make payments for flights or white goods, so long as you pay it off in full each month.
Our top recommendation is to use a savings account to begin accumulating your future deposit, as this clearly demonstrates to banks that you have strong affordability and money management skills, whilst also being clear evidence for understanding the source of your deposit funds, too. There is no need to be worried about your bank statements, as long as you can demonstrate all of the relevant green flags highlighted in this article.