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When applying for a mortgage, it’s well-known that income and credit history are important, but many people don’t realise that what their bank statements record can also have an impact and even create red flags on an application.
A recent survey by Boon Brokers revealed that 83% of people are unaware of the bank activity that raises unexpected “red flags” during a mortgage application. We’ve spoken to some mortgage experts about what these are so you can improve your chances of getting the mortgage you want.
Gerard Boon, partner at Boon Brokers, said: "Not all lenders will scrutinise your bank statements, but if you’re seen as a higher risk, perhaps with a smaller deposit or self-employed, lenders are more likely to take a closer look. Anything which shows that the account holder may struggle with debt or to control their spending is likely to create questions."
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Working for family members
Working for family members might seem like the perfect scenario but it isn’t when it comes to getting a mortgage. Lenders get nervous because it might be that family has only employed their relative so they can get a mortgage.
"We have seen a rise in staged income, especially since COVID. People go from salaries of £10,000 ($13,503) a year to £50,000 a year and when we dig a little deeper we find out it’s a family business and that their income is essentially inflated to improve their likelihood of getting a mortgage," says Sarah Tucker, founder of The Mortgage Mum.
Even if they are doing an actual job, the set-up may be informal, without a proper contract in place. In fact, it’s worth being careful of financial interactions made with family and friends in general.
The Boon Brokers survey flagged that 9% of those questioned didn’t realise that using rude/joke references for payments to loved-ones could hold up a mortgage application. The lender may misconstrue the meaning and want to investigate a transaction further.
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Buying multiple luxury items
It’s fine to treat yourself to something a bit special every so often but regular purchases of luxury items that you can’t necessarily afford is another area of concern. It suggests your spending doesn’t match your income and you could potentially get into debt and be unable to afford your mortgage repayments.
Having several store cards
Your shopping habits will be scrutinised by a potential lender and one thing they look at is your store cards. If you have several and are struggling to clear the balances each month, the warning lights will go on.
Store cards have attractive initial offerings but are known for their notoriously high interest rates once the grace period is over. "You don’t want to have too many 'tabs of credit' open. It shows that you try to get money from all sources, and can indicate that you have had to use lots of resources to get it," says Tucker.
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Vague Paypal transactions
Paypal (PYPL) transactions aren’t an issue in themselves but be aware that because it’s not clear who is being paid, too many vague transactions can raise suspicion.
"The key reason why payments to unknown parties are considered a red flag by lenders is because they are concerned about money laundering," Boon said.
Likewise, frequent payments to unknown third parties are also not advisable. To minimise the risk of a red flag, make the reason for the transaction crystal clear.
Any form of gambling – even something as minor as playing bingo – can act as a negative on your mortgage application. The odd game with friends is acceptable but playing regularly, with larger sums of money will definitely count against you. "From our experience, gambling is the main red flag that people do not realise could result in a declined mortgage application," Boon adds.
Buy Now, Pay Later
Catalogue and on-credit arrangements suggest that you can’t pay for day-to-day items upfront and are buying beyond your means.
Similarly, payday loans are widely regarded as being negative signals as they have high interest rates and people only take them out when they are desperate for credit. "We’ve really noticed some issues with sites such as Klarna as our clients are not realising that this impacts their credit score, and is a line of credit we have to take into account," Tucker says.
A Klarna spokesperson, however, said: "We are disappointed to hear that a small number of customers have had their mortgage applications declined because of how lenders have factored BNPL into their eligibility and affordability checks. People use Klarna’s BNPL products to access short-term credit enabling them to spread the cost of a one off purchase for up to 60 days. To suggest this is indicative of people buying beyond their means is completely unfounded."
Klarna said most of their customers repay in time and [banks] punishing them for accessing short term and low risk payment services is grossly unfair. "We’re engaging with mortgage lenders and brokers to help educate them about our products so they can be more accurately incorporated into any eligibility and affordability assessments.”
If you have an overdraft, how you manage it may well be looked at during a mortgage application. Don’t go over any arranged limit and try and only use it sparingly. Avoid being regularly in your overdraft at the end of each month as it sends a signal that your outgoings exceed your income.
Taking out a recent credit card
While having a credit card is actually seen as good for your credit score, if you pay it off every month, applying for a credit card shortly before applying for a mortgage isn’t a sensible idea. Lenders become nervous as it means someone has more debt to pay off, just when they are about to make a big financial commitment.
"Applying for a credit card will impact your credit rating because a hard search, resulting in a hard footprint on your credit file, will need to be carried out before a credit card can be issued. However, this impact is often temporary and scores generally recover over upcoming weeks and months," said Boon.
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Large cash deposits
Lenders like to see examples of steady, legitimate income so large cash deposits and cash-in-hand work will alert their spidery senses. Instead of cash, ask people to pay via bank transfer so the source of the money is recorded and can easily be traced.
That goes for what you spend your money on too. "Don’t draw out too much cash. Lenders don’t like when they can’t trace what you’re spending your money on,’ adds Tucker. "Try not to buy a new car in- between your mortgage application going in and your case completing. Lenders do a final credit check, and this can totally ruin your application."
Lack of regular savings
Savings aren’t just about building a pot for your deposit. Banks like to see evidence of regular savings, especially if the new mortgage you are applying for is more than your current rent or mortgage, as it proves that you will be able to afford the extra outlay. It’s better to save a little and regularly than to rely on larger but less frequent bonuses or commissions.
Banks don’t like to rely on such variable income when it comes to repayment ability. If you have any of these red flags on your account and want to apply for a mortgage, you need to think ahead.
“Many lenders will request an applicant’s latest 3-6 months of bank statements to view their spending activity and to verify the applicant’s income and/or deposit source. Therefore, I would recommend that applicants minimise any potential red flags for at least the last 6 months,” Boon said.