Yes, getting a payday loan can affect your chances of getting a mortgage. When you apply for a mortgage, the lender will be looking for a solid credit history, so they may be put off by seeing that you have resorted to using payday loans, especially if this is a frequent occurrence.
In spite of this, it is still possible to get a mortgage after using payday loans, and the lender may be able to see that you have paid them off in full within the agreed timeframe.
What Are Payday Loans?
Payday loans are high interest and short term loans which are designed to last the borrower until their upcoming payday. They are typically for small amounts, between $300 and $1000, however the amount can vary based on the lender.
Payday loans are only supposed to be used in emergency circumstances, for example to cover the costs of unexpected medical bills or funerals. They should not be used for any unnecessary spending or taken out to help repay alternative loans.
In order to apply for a payday loan, you will need an ID, source of income and a valid bank account. After applying, you can be approved for a payday loan and have the funds deposited into your account in as little as 15 minutes, meaning they are a quick fix in an emergency.
What Are Mortgages?
Mortgages are a legal agreement whereby a financial institution such as a bank lends money to those looking to purchase a property. The lender also charges interest and takes the title of the debtor’s property which means that if the borrower fails to meet repayments, the lender has the right to take away the property.
It is also possible to refinance your mortgage over time. Those over the age of 62 years old can also look into reverse mortgages.
Does A Payday Loan Affect My Chances Of Getting A Mortgage?
It is often misconstrued that taking out payday loans and then making the repayments on time will demonstrate that the customer will be capable of making mortgage repayments on time. However, this is not the case.
Whilst repaying back a payday loan on time will not negatively impact your credit score and may even improve it, lenders still may not want to provide a mortgage to applicants who they deem to rely on loans. As a result, customers are likely to have more flexibility if they do not take out payday loans.
Do Lenders Assess Loan History When You Apply For a Mortgage?
Lenders always assess loan history when they receive applications for mortgages. Lenders will be looking to see whether an applicant relies on payday loans regularly to see how they handle money and making loan repayments.
Furthermore, lenders are looking for how recently an applicant has relied on a loan to support their usual source of income. If you have not taken out a loan in the last five years, it will be unlikely that this will affect your chances of getting a mortgage.
If you frequently rely on payday loans, lenders will see that you struggle to make it month to month and consequently may reject your mortgage application. This will be because they do not trust that you will be able to make your mortgage repayments within the agreed timeframe.
Why Do Payday Loans Affect My Chances Of Getting a Mortgage?
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.
Finding a mortgage with a history of payday loan use can therefore be a little tricky. 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.
Charlotte is an expert writer with over 10 years of experience in the financial space. Follow her posts for useful advice and interesting facts on key topics such as money, finance and payday loans.