Many people have turned to payday loans as a short term fix to a pressing problem, from urgent car repairs to emergency boiler maintenance, but using this form of high-interest debt could hurt your chances of getting a mortgage.
Lots of mortgage lenders will decline your application if you’ve ever used a payday loan, especially if you took one out recently, but with the right advice, options could be available.
In our guide to getting a mortgage after a payday loan, you’ll learn how this form of borrowing can impact a mortgage application, how you can boost your chances of approval if you’ve taken a payday loan in the past, and how to find a mortgage broker who can help you out.
Meanwhile, our FAQ section tackles the questions we hear most often from customers who are applying for a mortgage with payday loan usage on their file.
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Can you get a mortgage after using payday loans?
Thankfully getting a mortgage after using payday loans is possible, yes. As we explain later in this article, most lenders decline customers who have recently used payday loans, some even decline if they show in credit history at all over the last six years.
It depends on how recent and regular the payday loan use was, along with your loan to value (LTV) and if you have had any other credit issues in the past.
Potential impact on a mortgage application
Mortgage applications can be subject to certain restrictions if the borrower has used payday loans. Some lenders might apply the following caveats…
Will payday loan use show up during lender assessments?
Your payday loan is likely to come to light during the credit checks for your mortgage, and there’s also the chance they could see evidence of it when you provide them with bank statements. Moreover, you should declare your payday loan usage in advance if you’re applying for a mortgage, as this is information the lender will need to know.
Impact on credit reports
Although credit scores offered by the main credit reference agencies such as Experian, Equifax and Call credit can increase if you actively take payday loans and have a track record of repaying them on time, having a payday loan on your file will not help you get a mortgage.
Reputable mortgage lenders will take a thorough look at your records in context and take note that your reference agency scores are higher because of payday loan use, which they take a dim view of.
Moreover, keep in mind that some mortgage providers don’t use credit scores at all. They simply search your report for the presence of adverse credit and will likely spot your payday loans during this process.
How much do payday loans negatively impact your credit score?
They can certainly hurt your chances of getting a mortgage to buy a house or any other type of property for that matter. Mortgage lenders have their own separate scoring model and lending policy, that specifically prohibits any payday use, and you will often be declined for a mortgage on application regardless of your “score”.
It may therefore be possible to have a 999 Experian score and still be declined for a mortgage.
How long a payday loan stays in your credit history
Your credit history will show any borrowing you take or payments you miss over the last six years. The older the registration date, the less impact it will have on any new mortgage application.
As mentioned above, some of the stricter lenders will decline your application if you have EVER had one, others accept use right up until the current month, if it can be explained.
How long to wait before you apply for a mortgage
This depends mostly on the Loan to value. Generally, the more deposit/equity you have, the better your chances of mortgage approval.
|Loan to Value||Number of lenders accepting payday loan use over 12 months ago||Number of lenders accepting payday loan use inside the last 12 months|
Note: The information in this table is accurate as of October 2019, Criteria can change regularly so it is important you make an enquiry and speak to one of the experts who can provide you with specific, up to date advice.
Why mortgage lenders don’t like payday loans
Regular payday loan use can cause issues with potential mortgage lenders, as mortgage underwriters can consider it mismanagement of finances and a potential indicator of risk, and we speak to hundreds of customers who have been declined as a result.
That’s not to say there aren’t lenders out there for you, as thankfully there are providers offering mortgages after payday loan use at competitive rates, and the specialists we work with already know which lenders will accept payday loan use.
Finding a mortgage with a history of payday loan use can be tricky for several reasons.
Bad credit and payday loans
It may be possible to get a mortgage with bad credit and a history of payday loan use. But with both on your file (or if it’s a joint mortgage with one bad credit applicant) things can be more complicated. This is because you will fall into two high-risk categories so therefore your choice of approachable lenders will be fewer.
Generally, payday loans and bad credit are viewed in the same light by mortgage lenders – if you have used a payday loan, even if repaid on time, it is considered by mortgage lenders as an issue.
Getting a mortgage with a CCJ or a mortgage with defaults can be tricky but still possible, other credit problems such as late payments, applying for a mortgage with debt management plans, IVA’s, and after a bankruptcy or repossession is potentially possible, with as little as 5% deposit in some circumstances. However, add to these recent payday loan use, and lenders are likely to scrutinise the application even further.
Often if a “life event” (redundancy, death in the family, or divorce etc.) has caused the adverse credit and you can evidence a recovery, it’s possible to get approved again. If, however, you have just been irresponsible with your money and there’s no reasonable explanation, it can be harder to convince a lender you are now creditworthy.
Speak to an expert about payday loans and mortgages
Your likelihood of getting a mortgage with favourable rates will increase dramatically if you apply through a specialist broker who understands payday loans and their potential impact on a mortgage application.
We offer a free broker-matching service that can pair you with the best advisor for your needs and circumstances. You won’t have to lift a finger while we introduce you to a fully-vetted broker who helps people with a history of payday loan use get on the property ladder every day.
Call 0808 189 2301 or make an enquiry and we’ll connect you to your perfect mortgage broker for a free, no-obligation chat that won’t affect your credit report today.
Still have questions about getting a mortgage with payday loan use on your file? Take a look through our FAQ section to see whether your query has been answered.
I’ve been declined by a lender because of payday loan use. Can I still get a mortgage?
It might still be possible to get a mortgage. The way to avoid being declined again is to apply to the right lender this time, one who knows about and is accepting of the payday loan upfront. It’s vitally important that you don’t go directly to another mortgage lender who declines payday loan users outright because too many applications in a short space of time can impact your credit file.
Such lenders can be difficult to find, especially if you’re hoping to secure the most favourable interest rates, and this is why you should always start by speaking to a specialist bad credit mortgage broker.
The advisors we work with have access to every lender in the business, including specialist providers who take a flexible approach to customers with payday loans on their files. They can introduce you to the lender who’s best positioned to offer you a table-topping deal, despite your credit issues.
We regularly see customers who have been declined a mortgage due to payday loan use, either on initial application or worse, having been approved in principle and then refused at the 11th hour on full application when the lender’s underwriter picks it up.
This can happen as lender scoring systems don’t always identify the payday loan automatically, giving false accept decisions that are later overturned when the human underwriter assesses the case.
Does the type of payday loan lender make a difference?
Not really. If you’ve borrowed from any payday lender in the past, it’s usually a red flag to mortgage lenders. Payday loans will show in your credit history as an “advance against income”, “short term credit”, or “revolving credit”, depending on the lender and the credit reference agency you search with, and will also show the lender name and payment terms.
If you have had a loan from any of the following lenders, they will appear as one of the terms mentioned above on your credit file: Wonga, Provident, Lending Stream, Sunny, Swift Money, QuickQuid, PaydayUK, Cash Float, Mr Lender, Pounds to Pocket, Piggy Bank and many others.
Can I get a mortgage with a payday loan default?
Getting a mortgage with a payday loan default is even more difficult, as not only have you relied upon short term credit to get by, you have been unable to pay it back after payday, which to lenders, is a red flag indicating that you may be really struggling with money.
That said, if you can evidence things are now back on track, then it’s not always terminal, and there are lenders who will consider you depending on how much deposit/equity you have available, and how recent the default was registered. If it was over 12-24 months ago, you have a much better chance.
This content was originally published here.