Getting a mortgage after a payday loan
Payday loans are short term finance options that are typically used by customers with bad credit that do not have the ability to obtain unsecured borrowing such as an overdraft or credit card through a main stream lender. Payday loans typically have very high interest rates sometimes over 1000%. Getting a mortgage after a payday loan is possible but some high street lenders view them negatively. Payday loans are designed to be short term lending for emergency situations they are not designed to manage long-term debt problems but research has shown that this is generally the case. Some lenders view these types of finance negatively as it may indicate that the applicant is not able to manage their finances if they are using these short term finance option.
Declined for a mortgage because of payday loan?
If you have been declined for a mortgage because of a payday loan don’t give up! You may have gone to a broker you were recommended by a friend or direct to a high street lender. If this is the case the broker may not have had the experience to deal with your circumstances. Many lenders will decline an application if there is a history of payday loans on your credit file, this is due to some lenders criteria not to lend to customers who have had payday loans.
A lot of customers have taken out a payday loan due to unforeseen circumstances and there is no doubt they have a place in the market, access to quick loans is good however these types of loans come with high fees and although they are marketed as a solution to one off cash emergencies studies have shown repeat use is very common and this can increase the perceived risk for lender.
If you have been declined because of a payday loan speak with one of our specialists today and find out how we can help you get the mortgage that you need.
Can I get a mortgage after a payday loan?
Basically Yes, if the only issue you have with getting a mortgage is a payday loan in the past then there are lenders out there that will consider your application. Some lenders will decline your application if you have recently used a payday lender, some may also decline an application if you have a payday loan within the last 6 years that shows on your credit file. Our specialists have the knowledge to know which lenders are lending to customers with payday loans this give you the upper hand and will stop you applying and getting declined automatically. The usual affordability and income checks will be applied but it is definitely possible to get a mortgage after a payday loan.
Why some lenders don’t accept payday loans
Some lenders consider regular use or recent use of payday loans as mismanagement of finances and a potential indicator of risk. With most lending decisions computerised for the majority of high street lenders this can mean that your application will be automatically rejected. There are lenders that our specialists work with that will look at applications on a case by case basis and these are the lenders more willing to lend to customers who have had payday loans.
If you have had an application declined there are a few reasons why this could have happened
Some lenders don’t really make it clear when it comes to criteria around payday loans, websites and customer service centres don’t mention the impact payday loans have on mortgage approvals. Without the knowledge of a bad credit mortgage broker you could be applying to lenders that internally know that they will not lend to customers that have had payday loans but they don’t make this clear to applicants before they start the process.
If you are using a broker that is not dealing with adverse credit mortgages frequently then they will not be up to date on all of the lending policies that all of the lenders have. This means they may think you have a good chance with a certain lender but have missed that they will decline applications if there have been payday loans.
Payday loan mortgage myth
A common myth is that payday loans can help to increase your credit score and increase your chances of getting a mortgage. Unfortunately while they do have the ability to increase your credit score if you pay them back on time it will make it harder for you to get a mortgage. This is because while your credit report is a major factor in the mortgage application process. Lenders use their own scoring and lending policy. If this includes prohibiting payday loan use, which many lenders policies do, it will mean your application will be rejected. This means that it is possible to have a perfect credit score and still be declined by a lender due to a payday loan.
This may seem odd as you will have heard using credit facilities and paying them off will show that you are managing your credit effectively and it will help to show you are on top of your finances. This is true for other kinds of borrowing. IF you take out a loan to buy a car and pay it off over 5 years this shows that you have planned a purchase and budgeted to pay the loan back over a set period of time. This kind of lending will help your application and show that you are planning and organising your finances well. The view that lenders take on payday loans is they were designed as a product to give customer’s access to money quickly when they need it. Even though the borrower may just need money quickly to fix a car or pay an unexpected payment quickly it shows lenders that the customer has no financial planning in place to accommodate unexpected bills.
This is why lenders don’t want to see payday loans on an application, it increases the risk that the potential borrower may not have good financial planning and if something were to come up they may miss a mortgage payment and fall into arrears. With the ever increasing population and a large amount of customers with clean credit histories and no payday loans many high street lenders can pick and choose who they lend too, this means that will look to only lend to the lowest risk applicants.
Payday loan and other adverse credit issues
If you have other adverse credit events on your credit file it will become more difficult to get a mortgage. If you have had other bad credit such as late payments, missed payments or a CCJ lenders will look at these as well as the payday loan.
While it is still possible to get a mortgage with a mix of credit issues it is harder and there are fewer lenders that are willing to review your application. The longer ago the adverse credit events are the better. If they are over 4 years ago and were for small amounts that have been settled then they will have less impact on your ability to get a mortgage.
If you can show potential lenders that your bad credit issue was in the past and you are now in a better financial position and are managing your money better, this will improve your chances of being approved.
The size of the deposit you have will also have a bid impact on your chances. The larger the deposit the less risk you pose to lenders.
We Can Help
If you have been turned down by a high street bank or are just starting to look at mortgage information you have come to the right place! Using an experienced bad credit mortgage broker can drastically improve your chances of being approved. Fill in one of our enquiry forms or give us a call on 0161 209 6700 and speak with an experienced advisor.
Updated: 4th January 2020