Can I get a mortgage After Using a Payday Loan?

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Article created by Christian Duncan, Director – Mortgage and Protection Adviser
Last updated 22nd December 2023

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Getting a mortgage after having a Payday loan

Securing a mortgage can be a daunting prospect, particularly if you’ve previously relied on payday loans. These short-term financial solutions may provide immediate relief, but they can leave long-lasting impressions on your credit history, potentially hindering future attempts to obtain a mortgage. This guide offers a roadmap to overcoming the hurdles payday loans may place in your path towards homeownership.

Understanding the Impact of Payday Loans and getting Approved for a Mortgage.  

The question isn’t whether a payday loan will obstruct your mortgage application, but how much will it influence the process. When studying your financial past, mortgage lenders will scrutinise payday loan usage as a significant indicator of lack of financial responsibility.   

Payday Loans: A Red Flag for Mortgage Lenders

Payday loans tend to set off alarm bells for lenders and can be a little bit of a red flag. At best, a historical, promptly repaid loan might be overlooked by some lenders if accompanied by a sound explanation. Conversely, if payday loans are a recurring theme in your credit history, lenders might question your ability to manage funds efficiently, which could severely limit your mortgage options. 

Lenders will want to understand what lead to the use of using a payday loan.  Usually this would be a life event such as:

Loss of Job
Bereavement
Relationship breakdown

The Direct Consequences: Limited Choices and Higher Costs

The repercussions of having used payday loans can be costly but with the right advice and plan it doesn’t need to last a long time.  The consequences of having a payday loan are:

  • Choice of Lenders: Your selection of mortgage providers will contract significantly.
  • Interest Rates: You might not have access to the most competitive rates.
  • Loan-to-Value (LTV) Ratios: Expect to need a larger deposit as lenders likely offer lower maximum LTV ratios.

Strategic Steps to Obtaining a Mortgage Post-Payday Loan

Securing a mortgage after using payday loans isn’t impossible. Here’s how to navigate this challenge:

  1. Consult a Specialist Mortgage Broker

Your journey should commence with expert advice. A mortgage broker proficient in cases like yours can tailor advice, increase your odds of approval, and potentially unlock favourable rates.

  1. Assess Your Credit Report and Situation

A thorough review of your credit report is crucial. Using a service like checkmyfile will give you a full autonomy of your credit profile over the previous 6 years. 

  1. Prepare the Documentation

Equipped with expert advice, prepare the necessary paperwork to substantiate your mortgage application.

The documents you can expect to be asked for ar

  • 3 Months Banks Statements
  • 3 Months Payslips if employed or SA302’s and Tax Year Overviews if Self Employed
  • Photo ID such as a valid Passport
  • Address ID such a valid Driving Licence
  1. Identifying Lenient Lenders

Discovering a lender that tolerates payday loans can be like searching for a needle in a haystack. Collaborate with your mortgage adviser.  Discuss previous cases and success stories they have had.  Ask what hurdles they come against previously and how they plan to navigate these with your application. 

How do Lenders Look at Payday Loan Users?

After Examining your credit profile, lenders weigh up factors such as the age of the last payday loan, frequency of use, and underlying reasons for borrowing. 

The Role of Loan-to-Value Ratios

Your required deposit size might need to increase if payday loans feature in your credit profile. For instance, an LTV cap at 75% implies that a 25% down payment is necessary.  This isn’t always the case but certainly something to consider before applying for a pay day loan.

The Time Factor

Generally, the more time has passed since your last payday loan, the better your mortgage options. After two years, acceptance by conventional lenders becomes more plausible.

Other financial issues such as CCJ’s, Defaults, and Late or Missed Payments

Complexities multiply with additional credit concerns.  It isn’t uncommon to look over a client’s credit profile and see payday loans with a list of other concerns such as missed or late payments, CCJ’s and Defaults.  A history of bad credit, coupled with payday loan use, necessitates a savvy broker capable of interfacing with niche lenders open to such complicated profiles.  Make sure the mortgage broker you use for this service has an abundance of experience.  You wouldn’t want a car mechanic replacing the engine on the aircraft you were getting on to fly, you would want the very best in the industry.    

Boosting Your Mortgage Eligibility

Here lie your best chances for mortgage approval post-payday loan:

  • Time: Distance yourself from the last payday loan usage. 
  • Credit Repair: Follow mortgage broker-recommended strategies to enhance your credit score.
  • Honest Communication: Full disclosure of payday loan history with your mortgage broker lender is essential.  Don’t try to hide anything because this will result in a mortgage offer being declined.        
  • Specialist Brokers: Their mediating role cannot be overstated—they can advocate for you and unlock doors to subprime lenders that aren’t available to anybody other than industry professionals.

The Final Takeaway: Mortgage Achievability with Payday Loans

Despite the hurdles, acquiring a mortgage after using a payday loan is feasible with the right strategy and guidance. Engaging a respected mortgage broker can significantly alter the trajectory towards securing your home loan. 

 

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