17 AUGUST, 2022

For those who have applied for a home loan, it is well-known that the lender – be it a bank or NBFC asks for a specific set of documents. The bank account statement is an essential document required by these lenders to determine the applicant’s home loan eligibility. Now one may wonder why this statement is so crucial for lenders - does it actually solve a purpose, or is it a mere regulatory formality.

Banks ask for applicants’ statements dated back to six months or a few years. This document reveals a lot about the applicants’ financial habits to the lenders, which is vital in determining their home loan eligibility. People don’t realise that a simple bank statement can tell a lot – saving habits, spending habits, ongoing commitments, income inflow and all these activities ascertain their financial standing to the lenders. The lenders can get a fair idea about the kind of person they are lending to and the risks that may be involved.

A bank account statement plays a role in not only the home loan eligibility but also the amount of home loan that will be approved and the home loan interest rate. From a lender’s perspective, a bank statement discloses a lot; this is what they assess to determine the applicant’s home loan eligibility:

Amount of income and its consistency

A key reason for checking a bank statement is because it reflects the applicant's income and highlights if it is steady or not. For instance, the bank statement of a self-employed person who started a business only six months ago may indicate a few credit entries, but that is no guarantee that the business is stable or the inflow will be the same in the future. Lenders will look for a more regular source of income over a period of time. 

Through a bank statement, a lender can assess the nature of the job and the kind of money that remains in a person's account. Self-employed individuals' bank statements assist the lender in authenticating the level of business activity against what has been declared in the loan application form or ITR (income tax returns). Any massive cash withdrawals or deposits will come to the forefront, raising suspicion unless the nature of business is such. 

For salaried applicants, bank account statements assist the lender in validating if the claimed salary depicted in the income tax return is actually being credited monthly to the bank account. If the two match, it is a genuine case. If not, the lenders will review the application with suspicion.

Financial health and saving habits 

Lenders are searching for the average balance being maintained in the bank account as this indicates how financially responsible the applicant is. It gives lenders an insight into whether there is sufficient balance to manage regular expenses. Individuals who consistently maintain a healthy bank balance are viewed more favorably as it indicates that the applicant's income is sufficient enough to cover regular expenses and still has money left over. 

Similarly, the bank account statement also highlights one's saving habits, indicating their financial health. For instance, if there is a monthly outflow in a Systematic Investment Plan, insurance premiums are being paid, and transfers to a Public provident fund account, the applicant has good saving habits. These indicators suggest financial discipline. A Bank Account Statement gives an overview of the applicant's financial health and reflects the account holder's prudent saving habits, which are viewed positively when establishing the applicant's home loan eligibility 

Nature of debts and the account balance

A low account balance and numerous debit transactions leading to that are not viewed very well by lenders. If there are multiple spends on discretionary purchases and the applicant is not sustaining a sufficient account balance, it points to financial indiscipline. A statement showcases each debit and credit card transaction towards online purchases and other frivolous buys, which can adversely impact the overall home loan eligibility.

The increased adoption of digital payments makes these transactions very easy to decipher. There is a rising trend of using digital modes such as e-wallets, net banking, and credit cards to make purchases, both offline and online. The quantum of such payments helps the potential lender to recognize the applicant's spending habits and patterns. This is viewed with respect to the applicant's income – if the ratio of spending to income is very high, it adversely impacts the applicant's home loan eligibility. If the spending is commensurate with the earnings and well within the applicant's means, they are deemed more favorable candidates. 

Ongoing Loan and EMI repayment behavior

Going through an applicant's bank account statement will divulge any patterns in terms of amounts being debited and at what intervals of time. The lender can easily detect if an EMI is being paid out monthly, indicating an ongoing loan. It is a known fact that the presence of a current loan is a critical aspect that is factored in to determine one's home loan eligibility. This is because this means the applicant already has a commitment, leaving them with a lesser amount to service a new loan. The home loan eligibility does get unfavorably impacted if there is an ongoing loan. 

Another thing that comes through upon reviewing bank statements is the applicant's recent credit behavior. Bank statements provide up-to-date information about EMIs being honored or not honored on the due dates, whereas credit bureau reports have a 30-day lag. The bank account statement is more likely to highlight recent borrowings or defaults on the current month's EMI than credit bureaus.

Cheque Behavior

The value of the cheques, as well as the volume of the same being deposited or returned, speaks a lot about the applicant's business standing and financial health. The bank charges an individual when the cheque bounces. It shakes the lender's trust in the applicant. A lender would not want to lend to someone unaware of their account health or appropriately managing their expenses.

To conclude, apart from a candidate's financial overview, a bank account statement also authenticates personal credentials. The bank account statement will carry information such as the name, Address, Email ID, Aadhar card number, and PAN card number, which is also required on the loan application form. This allows the lender to cross-check all this information and corroborate it. All the above aspects play a crucial role in determining the home loan eligibility of an applicant, declaring the bank account statement a crucial document for lenders. 

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.

Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.