In This Article
Do payday loans affect a residential mortgage?
People commonly ask whether payday loans can affect your residential mortgage application.
It is possible for them to have a negative effect when you come to apply for a mortgage.
The reason is, if you are taking short-term finance such as payday loans, it suggests to a lender that you do not have full control over your monthly cash flow, and can make them wary about lending to you at this time.
Payday loans are usually at a high rate of interest lent to people that do not have another alternative way of raising funds at that time.
It is not impossible to get a mortgage if you have recently taken payday loans. All lenders have different lending criteria, so view things in their own way.
Although some lenders have reasons to say that they cannot accept applicants with payday loans taken within a certain time period, for example 6 months, some lenders are willing to be a bit more flexible.
The lenders that can consider it will still need to be comfortable that finances are under control and payday loans are not expected to be taken going forward.
Depending on the situation, it may mean that you need a specialist lender who pays the mortgage rather than a lender from the high street.
A skilled mortgage advisor would be able to assess your situation fully to work out which lenders may consider your application.
Most mortgage advisors are willing to offer a free consultation so you understand your options.
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Do payday loans affect a buy to let mortgage?
If an applicant’s credit file is clean, a payday loan is less likely to be an issue on a buy to let mortgage application than a residential mortgage application.
The reason is, with residential mortgages, your affordability is taken into consideration to determine what you can borrow.
If you are taking payday loans, it suggests that you are not making it through the month successfully without emergency borrowing.
For a buy to let mortgage, the lender’s main concern is the amount of rent that a property is generating, and the applicant has including credit.
This does not mean that a payday loan could not lead to a buy to let mortgage application being declined by the lender.
Buy to let lenders underwrite their applications differently, so will treat a payday loan in their own way.
If the lender is concerned about your monthly cash flow, they may take issue with the finance and decline the mortgage application.
Your mortgage broker will be able to request your credit file to see how many payday loans have been taken over a certain period, for example, the latest year.
With this information, they should be able to get a clear idea of which lenders are suitable for you. It may be that a specialist buy to let mortgage lender is needed, depending on the situation.
Do payday loans show up on your credit file?
Payday loans would usually show up on your credit file.
There are usually many entries on a person’s credit file for things such as mortgages, loans, hire purchases, credit cards, overdrafts and more.
A lender can usually find a payday loan on a credit report based on who the creditor is, the name of the entry (such as payday lending, short-term finance etc) and perhaps even the terms of the loan being very short.
This will tell a lender that you are using payday loans, possibly resulting in a mortgage being declined.
A mortgage advisor will be able to view your credit file to assess whether these entries are showing on the report, and what impact they may have on your mortgage.
Would payday loans affect a bridging loan?
It is unlikely that a recent payday loan would affect a bridging loan. With most bridging loans, the interest is retained and then cleared at the end.
This maybe when the asset is sold or refinanced to another lender. As a result, bridging loan lenders are usually more flexible on adverse credit.
This means that if a payday loan had recently been in place, the lender should be able to still offer the finance if all else met criteria.
As all lenders have their own individual lending criteria, you should search or find out whether a payday loan would affect your application and look for an experienced bridging loan broker in this situation.
Your broker will likely be a member of the National Association of Commercial Finance Brokers.
If you are planning on taking a bridging loan, make sure that you are clear on your exit strategy, as getting stuck on bridging finance can be expensive.
If you plan to remortgage the property in the future, you should talk to a competent mortgage advisor to make sure that you will meet their criteria to refinance in the future.
This is especially important if you have had recent payday loans that may affect your mortgage application.
Should I delay taking a payday loan if I am taking a mortgage?
If you are in the process of taking a mortgage, it is unlikely that it would be wise to be taking payday loans at the same time.
A lender would view this negatively as it would suggest that you are having issues with your cash flow and need emergency finance to get through the month.
You should also consider very carefully whether it is the correct time to be taking a mortgage if your finances are not under control.
A mortgage is a financial obligation that must be met every month regardless of your circumstances.
If you believe that you are not in a healthy financial position at this time, speak with a qualified advisor that can help you to understand your position in more detail.
Your mortgage advisor and lender will need to be comfortable that you are in a position to make payments on your mortgage, so tell them the full situation in order to get best advice.
If you were struggling with your finances, you may want to talk to Citizens Advice to see if they can help you.
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How can I find out whether there are payday loans showing on my credit report?
A payday loan should be showing on your credit report. Depending on the creditor, how the entries show on the report may vary.
Commonly, they show as short-term loans, the creditor’s name, monthly payment, and balance.
It will also show how you conducted the commitment, whether payments have been successful or if the account is in arrears.
Lenders use this information to determine whether they believe you are a good fit for one of their products.
Three major credit reference agencies in the UK are Experian, Equifax and Transunion.
A good website that allows you to view from all three of these agencies is Check My File.
You can sign up for a free trial and download a credit report. This should show you data from your payday loan providers.
If in doubt, pass your credit report to a qualified mortgage advisor who can help you to understand it.
Are payday loans considered adverse credit in the same way as missed payments or defaults?
Lenders have different views on how they see things. This means that some lenders review payday loans as a credit impaired entry, similar to a default.
This is because it is an emergency borrowing which usually means an applicant has run out of money and needs to pay a high rate of interest to bridge a gap.
Other lenders may not see it as being so serious, as long as the financial obligations have been met.
Most lenders do have their own criteria around when they would accept an applicant that has used payday loans.
For example, a lender may say that they need a payday loan to have been redeemed for at least 6 months before they will qualify for a mortgage with them.
Others may have a shorter time, such as 3 months, or perhaps a longer amount of time, for example, 1 year.
Your mortgage advisor will be able to carry out some research to find out which lenders may consider you based on when you had a payday loan.
Why should I use a mortgage advisor if I have had payday loans?
When you are considering taking a mortgage, having a qualified broker on your side is always a good idea.
If you have taken payday loans, this is likely to be even more important.
The reason is, not all lenders will accept applicants that have recently used payday lending, so you will want to approach the correct lender.
Some lenders consider payday lending as adverse credit which may result in a higher rate of interest.
This may not always be the case, so talking to an expert mortgage advisor that has knowledge on how the individual lenders work, would give you the best chance of being able to place your transaction.
Look for a mortgage advisor that is regulated by the Financial Conduct Authority and can offer you a free consultation before any paid work is undertaken.
Conclusion
Payday loans are a short-term finance facility to help somebody get through the month when they may not have been able to otherwise.
Lenders often show concern with recent payday lending facilities due to questions around an applicant’s monthly cash flow.
It is not uncommon for a lender to need a certain period of time to have past, before they will consider the applicant for a mortgage.
However, lenders all have their own rules so what may be acceptable to one lender, may not be to another.
As a result, it would be prudent to look for a mortgage advisor with experience in arranging mortgages for applicants that have taken payday loans.
They can then take the time needed to understand your full situation, and if they believe you are in a suitable position to pay a mortgage, help you to look for a mortgage lender accordingly.
If you would like I NEED ADVICE to match you with a qualified mortgage advisor, who can offer a free consultation, please complete the contact form.
They are experienced, which can boost your chances of being approved.
