Getting a mortgage after using pay day loans can be a challenging process
Read on to explore more about these short term loans and how you can still find a mortgage lender to finance your property after using pay day loans.
What Are Pay Day Loans?
People often take these loans out for an unforeseen emergency situation such as to cover boiler repairs or a vehicle break down. They offer instant money when needed but they usually come with a very high interest rate and fees, which may be disproportionate to the amount borrowed. For example you might have an interest rate of 1000%. For this reason, pay day loans are mistrusted by some and are also sometimes deemed exploitative.
Studies have also shown these loans are often repeatedly used by a borrower, even though they are supposed to be for one-off emergencies. Pay day loans appear on your credit file and they can show up in your history for six years. Indeed, any borrowing will appear in your history for that long. The older the loan, the less impact it will have on your chances of securing the right mortgage. So if you took a loan out five years ago and repaid it on time, this shouldn’t have as much as bearing on your mortgage application as a loan you have just repaid last month. However, strict lenders might turn you down immediately products of this type feature anywhere in your history.
Mortgages and Pay Day Loans
Some lenders are wary of giving mortgages to people who have used pay day loans at any time in the last six years, so the use of these products can damage a person’s credit history in the eyes of the mortgage lender. Other factors that make a difference include the loan to value (LTV), how often a pay day loan was used and if the customer has had any other problems with credit in the past. Short term loans can actually increase your credit rating if you always pay them off on time. However, for mortgage lenders, this is a different matter because they do not rely upon the credit reference agencies' scores. They use their own scoring model which almost invariably downgrades those who have used pay day loans.
Depending on the lender, some internal scoring models prohibit the use of any and all pay day style loans so you could automatically be declined if this is found in your history, whether or not you paid the loan off in full on time. You may even have a perfect credit rating, yet still be turned down for a mortgage because of historical pay day loan usage.
Because we play by the book we want to tell you that...
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances. The fee is up to 1.5%, but a typical fee is 0.3% of the amount borrowed.
Getting a mortgage with pay day loans in your history can be challenging because lenders are less than transparent as to their specific criteria. Many brokers don’t realise that pay day loans make such a difference and as they don’t necessarily have much experience with customers in this situation, they are unable to advise appropriately. Some brokers have been known to take a trial and error approach, which means you make one or more applications in any case and wait to see if any are accepted. This can needlessly extend the time scale of the process and may negatively impact your credit file if the lenders use 'hard' searches as these are recorded and can affect your credit score.
Mortgage Applications with Pay Day Loans
The number of lenders offering mortgage approval after pay day loans is limited. For this reason, borrowers are restricted in choice and the those who do offer mortgages can use their monopoly to charge higher fees. You might also find limited options when it comes to the structure of the finance and the repayment plans available. The loan size will differ depending on the lender. The amount could be capped at 4x your income, or it might be 3x your income, while others can use a more complicated formula to determine the maximum amount you can borrow. You could even find yourself in the position of getting an offer of £150,000 from one lender and £250,000 from another as their formulas are so different.
Your employment status and income will make a significant difference to whether or not the lender sees you as high risk which will also have an impact on the amount you are able to borrow. The higher the deposit or equity, the more likely you are to be successful in applying for a mortgage after pay day loans. In fact, even lenders who traditionally turn down any applicant with a pay day loan history might be willing to listen to an argument if the case is put forward convincingly.
The stance of the major banks is normally not to approve borrowers who rely on pay day loans regularly. Relying on short term credit all the time will make you ineligible for their products. However, if you can show the loans are one-offs, you might be able to convince the banks to lend and thus be successful in getting a mortgage after pay day loans.
Adverse Credit Mortgages
It is just a matter of finding the right lender and researching the best product. In many cases, the reason behind a pay day loan may be a traumatic life event such as bereavement or divorce. People can find themselves in adverse circumstances and need quick cash so they resort to short term loans. If a life event like this has affected your financial standing, this can be explained and it may be possible to be approved for finance again.
However, if the need for a pay day loan was simply poor money management or irresponsible behaviour, it may be more difficult. You will need to give a reasonable explanation as to why you took out the loan, in order for any adverse credit mortgage to be a possibility. If you default on a pay day loan, this sends a very negative signal indeed. It suggests to potential lenders that not only did you need a short term loan, but that you were not able to pay it back on time. This can be a slippery slope as with such a high interest rate, costs can spiral out of control.
Failing to pay back the loan at the agreed rate and time after pay day would signal to lenders you are struggling with money beyond one emergency situation, so they would be less inclined to offer a mortgage after payday loans.
What to Do if Refused a Mortgage
Lender credit scoring formulae do not always pick up a pay day loan immediately, so an application could be given approval prematurely only to be revoked subsequently when the loan is discovered. This can be heartbreaking if the borrower has planned for purchasing their new home or remortgaging only to discover they can no longer finance the project.
Pay Day Loans and Mortgage Approval
Don't lose heart if you have been refused a mortgage after payday loans. If this happens to you, the solution is thorough research to identify lenders who will look sympathetically at your situation. Our expert team have many years of experience and good working relationships with a wide range of lenders. This may include access to products and lenders that are only available via intermediaries.