Most people need a mortgage to buy their first home and since the last financial crash, the application process has become increasingly stringent.
If you’re applying for a mortgage, you should be prepared for a forensic examination of your bank statement. Any loans and hire purchases you’ve taken out are considered but you’ll even have to account for your spending on socialising and leisure – including, for example, restaurant trips and gym memberships.
There are, however, 3 things that can seriously derail your application if they appear anywhere on your bank statements. They are red flags to mortgage underwriters, who ultimately decide whether you are a good enough risk to grant a large loan to.
1 Online Gambling
According to the Gambling Commission, online gambling accounts for 33% of all gambling in Britain and between April 2015 and March 2016, the market was worth a staggering £4.5 billion.
So given how commonplace it is, surely there’s no problem if you have a flutter online?
The simple fact is that gamblers are viewed as risk takers and mortgage lenders favour applicants who have a lower risk profile. Evidence of online gambling on your statement never helps your mortgage application and the more regular the payments, the dimmer the view most lenders will most likely take!
2 Unauthorised Overdrafts
It’s pretty normal for people to have an overdraft facility attached to their bank account. Lenders, however, note your use of this facility when considering your mortgage application.
Legally your bank can demand repayment of your overdraft at any time because an overdraft isn’t a formal loan agreement. Therefore lenders take the view that frequent use of an overdraft isn’t good money management because it looks like you’re not ‘living within your means’ each month.
That said, getting an unauthorised overdraft is regarded as much worse. It’s a very expensive way of borrowing money – there are frequent complaints about unauthorised overdraft charges – but to a lender, it shows that there’s a high risk you’ll default on mortgage repayments at some stage.
You should only use your overdraft in emergencies if possible and clear it every month: don’t get into the habit of treating the limit as your zero balance point.
3 Pay Day Loans
Although the pay day loan market has shrunk since the introduction of price cap regulation in 2015, it’s still fairly common for many to take out a loan of perhaps £200 to ‘tide them over until payday’.
It’s hopefully very well-known now how expensive this form of borrowing is – the APRs are frequently greater than 1,000% and some up to 6,000% – but you should be aware that it’s also a huge red flag to mortgage lenders.
Banks automatically assume you are a higher risk if you require this form of credit and I’ve been informed that some lenders reject mortgage applications on this factor alone.
Time heals all!
The good news, if you’ve fallen foul of any of the above, is that time is the greatest healer regarding all credit matters. You are advised to wait at least 6 months after you’ve before you’ve made use of any of the above before making a mortgage application. You should regularly check your credit report too, to see how lenders are likely to judge you and to see if there are any errors that are unfairly affecting you.
It’s also worth considering using an independent mortgage broker to help you successfully get your home loan: they act in your interest in finding the best product for you and can help you throughout the application process.
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