Mortgage after payday loans is often confusing and contradictory, but here is some information for you. To help you understand everything you should know about mortgages and payday loans, we’ve written this guide.
If I use payday loans, can I still acquire a mortgage?
The short answer is that it is possible to obtain a mortgage after using payday loans, but it can be challenging. You won’t have the same flexibility as borrowers who have never taken out a payday loan, in addition.
As with other mortgages, each lender evaluates mortgage applications based on specific standards. A recent payday loan alone may cause certain lenders to reject your mortgage application. You can be rejected by other lenders if you have a single payday loan five years ago!
The following list represents the majority of lenders’ evaluations of mortgages following payday loans:
- Your usage pattern for payday loans
- When was your most recent payday loan?
- If you’ve experienced credit issues
- Your mortgage’s loan to value
Myth: If I take out a payday loan, I can acquire a mortgage.
A payday loan most definitely does not increase your chances of getting a mortgage, despite the fact that there is a lot of contradictory advice available online (as there is with everything!). The sheer amount of people who think it’s possible to obtain a mortgage using payday loans astounds us.
Let’s put this to rest once and for all. Experian and Equifax are two credit reference organisations that evaluate your score in part based on how current your credit is. Your credit score may suffer if you are late with your credit payments.
Your credit score will increase if you make your payments on time. By taking out payday loans and paying them back on time, you actively demonstrate to credit bureaus that you can maintain good credit. As a result, this can raise your credit score as it demonstrates that you are a responsible borrower.
What, therefore, is the drawback to obtaining payday loans?
Despite the fact that mortgage lenders will look at your credit report, using payday loans may cause your mortgage application to be rejected. It’s crucial to keep in mind that lenders will have their own set of rules. Credit scores are only considered during the evaluation process.
The key takeaway from this is that you can have the best credit score conceivable and yet face mortgage rejection. You just can’t rely on a high credit score to acquire a mortgage if you’ve used payday loans. Lenders would always favour a borrower who does not rely on payday loans over a borrower who does.
Mortgage after payday loans are disliked by mortgage lenders, this is why?
Lenders generally steer clear of applicants who have taken out payday loans. Lenders may advise against getting a mortgage if you have previously relied on payday loans to cover your payments.
Underwriters typically think that borrowers have only used payday loans because they lack a solid financial foundation, which is the main cause. Payday loans can therefore raise red flags for most lenders as they indicate candidates who pose a significant risk.
Don’t be deterred by this. After payday loans, there are still a number of lenders who provide mortgages, often at very reasonable rates. Finding the appropriate loan is essential.
You would need to go to “Lender B” if “Lender A” doesn’t accept mortgages following payday loans but “Lender B” does. This could seem like common sense, but only if you know where to go and what requirements lenders have.
Lenders don’t make their evaluation standards readily accessible to the public. They also won’t talk you how payday loans will impact your mortgage. Only seasoned advisors will be able to provide this information due to their frequent contact with lenders.
Can I still get a mortgage from my bank if I use payday loans?
Most consumers will often approach a high street bank right away, but if they are turned down, they stop trying to obtain a mortgage altogether.
An expert’s knowledge and experience can guarantee that you are aware of the most appropriate lenders to contact. This means that if you have utilised payday loans, you will need to secure your mortgage using a structured way.
The last thing you want to do is risk your mortgage application being denied. If you are rejected, this will just result in further setbacks for you and be a time and money waste.
What if my payday loan was obtained more than five years ago?
When you most recently used payday loans determines everything. If it has been more than six years since your previous payday loan, you should have little trouble getting a mortgage. This is especially true if everything else, like your credit file, is unharmed. Obtaining a mortgage may be challenging, but not impossible, if you previously used payday loans.
It’s crucial to keep in mind that some lenders may still reject you if you’ve ever utilised a payday loan. Some lenders will be suspicious if you have a payday loan history, even if it was ten years ago. Nevertheless, there are numerous lenders available on the market who will generally ignore the use of payday loans if it occurred more than six years ago.
Can I still borrow money if I’ve already had a payday loan?
It’s challenging to estimate how much you can borrow if you need a mortgage after using payday loans and haven’t yet spoken to a mortgage expert.
Having said that, there are a few things that will affect how much money you can borrow after using a payday loan.
Affordability and the evaluation process used by lenders
The maximum amount you can borrow will vary because each lender will evaluate your affordability based on unique circumstances.
Mortgages from most lenders are typically limited to three to four times your annual income after payday loans. Other lenders might determine how much they’ll lend using an entirely different methodology.
‘Lender A’ might be willing to lend you up to £150,000, whereas ‘Lender B’ would be willing to lend you up to £250,000. ‘Lender C’ might not approve a borrower who has utilised payday loans, and ‘Lender D’ might reject applicants with a range of incomes.
This is why having a knowledgeable mortgage advisor may be quite helpful. Advisors can present your income in the most favourable light possible to improve your chances of being accepted.
Mortgage after payday loans, is a sizable deposit required?
There will be fewer lenders available if you need a mortgage with a 90–95% loan to value ratio and a 5–10% deposit. The use of payday loans makes this even more clear.
Therefore, the bulk of lenders will call for at least a 10% down payment and only provide 80–90% mortgages. Nevertheless, even after using payday loans, some lenders could issue mortgages with a 5% deposit.
Mortgage after payday loans interest rates and costs
Lenders will consider you to be a bigger risk than average if you are applying for a mortgage after using payday loans. In order to provide them with security, lenders will typically demand higher rates and fees, however this primarily depends on the borrower.
For instance, you can be offered excellent rates with low costs if you have a sizable deposit, excellent credit, and a history of using payday loans.
What kinds of mortgages are available?
After using payday loans, lenders will have less options, thus you might also have fewer options for mortgage types. For instance, if you had a choice, you could choose from a variety of mortgage products, such as fixed or tracker rates, interest-only mortgages, or repayment mortgages. But in this instance, you might only be given a mortgage product with a few choices.
You might not be able to select from all the many sorts of mortgage products if a specific lender were to offer you a specific form of mortgage.
Bad credit and payday loans
Things might get very challenging if you use payday loans and also have poor credit. Having said that, those with the following credit issues can still obtain a mortgage after using payday loans:
- Plan for managing debt (DMP)
- IVA for late payments and arrears
- Home foreclosure
Lenders will examine every aspect of your application in addition to payday loans since they view you as a high risk client.
A lender does not want consumers to use payday loans to make mortgage payments. This is due to the possibility that your finances could afterwards spin out of control.
What happens if I have a payday loan default?
Lenders will consider you to be a very high-risk borrower if you have ever taken out a payday loan and then defaulted on it. This is because you used a payday loan to the point of defaulting on it, which indicates to a lender that you’ve experienced financial issues.
You may have proof that you are now financially solid, which can increase your chances of getting a mortgage because every case is unique. Additionally, if the default occurred a while ago or you have a sizable deposit saved up, it will benefit your mortgage application.
Which lenders offer payday loans for mortgages?
Not all lenders are as rigorous, and some will consider your unique circumstances. You might have experienced a trying period in your life, such as a divorce or a period of poor health. Your capacity to manage your money might have been directly impacted by this.
Lenders can realise you’ve reclaimed financial control if you can demonstrate your recovery. Some lenders may be persuaded to look past the use of payday loans by the borrower’s return to financial stability.
Lenders may need extra evidence to support their decision to approve your mortgage if you have been irresponsible with your money and have accrued debts that you could have avoided.
I was rejected due to a payday loan
Don’t panic if your application for a mortgage was rejected because of payday loans. We frequently converse with members of the public who have likewise been denied permission to continue and later obtain a mortgage.
Sometimes mortgage applications are rejected at the last minute, which is terrible. Some lenders evaluate applications using computerised systems. Because they haven’t been given any more information, underwriters will simply reject the mortgage if they find certain problems. Reversing the decision is frequently difficult, but it is doable.
This is why speaking with an expert is always worthwhile. Our consultants can submit your application to the most appropriate lender. Should something raise questions for the underwriters, we’ll be in close contact with them as well.