What do mortgage lenders look for in bank statements?

When you apply for a home loan, you will need to submit a number of documents as part of the application process, including recent bank statements, proof of income and details of existing loans. These documents are reviewed by the lender with a fine-tooth comb as part of assessing your eligibility, and determining your risk of default.  

You may be curious as to why mortgage lenders specifically look at your bank statements. Put simply, this is because your bank statement helps to illustrate:

• Your income
• Your necessary expenses
• Your frivolous expenses
• Your ability to save
• Your existing debts

Lenders want to take stock of how you spend your money to calculate if you can afford mortgage repayments. Your past financial behaviour is a key component of a lender’s eligibility critieria, as the bank or lender must legally determine that you will be able to pay your mortgage instalments on time - even if interest rates rise.

What mortgage lenders are looking for in your bank statements 

Typically, when you apply for a home loan you will need to provide copies of around three months’ worth of bank statements. Here's what a lender may pay closer attention to when looking at your bank statements:

Regular and consistent income

Your bank statements help establish that you are regularly earning an income. Lenders will not approve mortgages for borrowers who are not employed, or that do not meet minimum income requirements. The lender will look at your bank statements to assess the frequency of your income and the net amount you are paid.

The pattern of expenses from your account

Your lender will categorise the debits and payments made into your bank accounts to create a picture of how much you earn and how much you spend each month. They do so to create an understanding of whether you will have sufficient funds to meet your mortgage repayments after taking the home loan.

 These categories may differ for each lender, but generally refer to:

• Rent
• Groceries
• Utilities, like electricity and gas bills
• Insurance
• Liabilities, like car loan or credit card payments. 
• Entertainment, like online shopping, dinners out and more. 

They use your bank statements to confirm that you will be able to pay for existing essentials such as insurance, or kids education fees, after you take out the mortgage. They will also check for any other liabilities that you may not have mentioned to them, such as scheduled direct debits from your account. 

If your account balance frequently hits zero, gets overdrawn almost every month just before your next salary is due, or if your entertainment expenses are high, lenders may determine that you will not be able to meet mortgage repayments comfortably. 

This is why experts recommend cutting down on frivolous spending, such as takeaway food and shopping sprees, in the months leading up to your home loan application. This will reduce the payments categorised as entertainment, giving you more room in your budget for mortgage repayments. 

How fiscally responsible you are

Home loan lenders favour borrowers that pose the lowest risk of default, and they look for evidence of fiscal responsibility in your bank statements. One of the ways they do this is by calculating how much you save. In fact, many home loan lenders want applicants to demonstrate genuine savings that are at least three months old before they will approve borrowers for a loan.  

Genuine savings refer to money you have saved up gradually over time, as opposed to a work bonus, a tax refund, inheritance or even a lump sum payment from family right before you apply for the loan. Most lenders will accept all or some of the following as genuine savings:

• Savings held or accumulated in your bank account for a minimum of three months;
• Term deposits held for three months or more;
• Gift money held in your account for more than three months;
• Shares or managed funds you have held for more than three months.

On the flip side, lenders will also look at your bank statements to see if there are dishonoured payments or late charges on the credit card or utility bills. These kinds of charges may raise a red flag in the lender’s mind that you struggle to meet your expenses and may not be financially responsible enough for mortgage approval. 

You have the funds for the deposit

A mortgage lender will also use your bank statements to confirm that you do have a sizeable enough deposit for home loan approval. 

Banks prefer borrowers capable of putting down a deposit of 20% or more of the value of the house. Whether you are putting down exactly that amount, or more or less, your lender may like to see it in your bank account before approving the loan.

What you can do if your bank statements don't match bank expectations

You’ve applied for a home loan but received a rejection from the lender. In this instance, your bank statements (and other documents) may have indicated that you are not an ideal applicant for a home loan. 

So, what can you do if your bank statements don’t meet the lender’s criteria? Before you apply for your next home loan, it’s good practice to set up habits now that show lenders you’re a responsible borrower. 

Some of these responisbile practices may include:

1. Paying off your outstanding debts first, including student loans (HECS/HELP).
2. Growing genuine savings, or having savings sit in your bank account for at least three months.
3. Cut out frivolous spending in the lead up to your application.
4. Paying your bills on time - setting up direct debits can help to avoid late fees.

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