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Mortgage after pay day loans

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Feb 8, 2023

Getting a Mortgage After Payday Loans

Life is unpredictable. It is full of curveballs; more often than not, those don’t come cheap. Your car breaks down, and you need it to get to work, your dog breaks their leg, and there you are – making an emergency trip to the vet.

In a perfect world, you whip out your debit or credit card and swipe it to make the payment. Unfortunately, this is a luxury most Brits don’t have for many, and most people don’t have savings or a credit card to fall back on.

These people, particularly those with a poor credit history, resort to taking out payday loans to bail them out of their financial crunch. They are fast, convenient, and have little to no borrowing requirements. The catch is – they come with unbelievably high-interest rates, making it almost impossible to repay them if you fall behind.

Getting a mortgage after payday loans can be difficult if a prospective mortgage lender sees it in your credit history. While they might seem harmless, they can be detrimental to your overall creditworthiness.

Is it possible to get a mortgage after payday loans? Why are they so problematic for mortgage applicants? This guide explores the answers to these questions and more.

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Why is a payday loan bad on a mortgage application?

Even though payday loans don’t impact your credit score and you repay the loan providers on time, mortgage lenders don’t like them. It suggests financial mismanagement, an improper debt management plan, and that you cannot live within your means.

That said, some mortgage lenders won’t take issue with one payday loan that you settled on time, although there’s a good chance they’ll ask you about it and the circumstances that prompted you to take it out in the first place.

On the other hand, if your credit history reveals a pattern of periodically taking out payday loans, or worse, rolling them over from month to month, it tells lenders that you are struggling to keep up with your current financial commitments. The last thing they’ll want to do is saddle you with a mortgage they believe you won’t be able to handle.

Payday loans will appear on your credit file like any other line of credit. Mortgage lenders will see it when doing their due diligence for your mortgage application. There’s no way to get around it.

For this reason, ensure you’re forthcoming with this information when filling out your mortgage application. If you don’t declare it, and it comes to light during the mortgage credit check that you’ve taken payday loans in the past, your application will likely be declined.

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Is it possible to get a mortgage after payday loans?

Yes, it is. A payday loan in your credit history doesn’t preclude you from qualifying for a mortgage. However, it will limit the pool of lenders willing to advance you the funds you need, but it is not a deal-breaker.

The two most important things a mortgage lender will look at when assessing your payday loan history are:

  • How long has it been since you took one out?
  • How often do you use them?

Most lenders will decline your application outright if your credit report reveals that you have a credit issue like an open payday loan when applying for your mortgage. On the other hand, if the last time you took out a payday loan was 4-5 years ago, it is less likely to affect a lender’s decision on whether or not to grant you a mortgage.

Most mainstream lenders will not consider your application if you have a payday loan in your credit history.

However, speciality bad credit mortgage providers will. They have a higher risk appetite than their high street counterparts and would be open to reviewing your application and the circumstances surrounding you taking out the payday loan.

Depending on the level of risk you pose to the mortgage provider, they’ll be able to work out the maximum loan-to-value ratio they can offer you, the interest rate, and the terms of your mortgage. A payday loan won’t appear on your credit report as a “payday loan.” It will likely be marked something along the lines of “revolving credit,” “short-term credit,” or “advance against income.”

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Can you remove a payday loan from your credit history?

Your credit report shows all instances of borrowing and any financial issues you’ve picked up over six years. Once a lender reports a credit issue, it will remain in your file for that duration even after you resolve it.

If you take out a payday loan, it will show up on your credit file. If you miss a payment, it will reflect in your report. If you default on it, it will appear on the credit report. If you settle the payday loan balance, it will show up as satisfied on your report.

In short, once you take out a payday loan, everything that happens during its lifetime will show up on your credit report, where it will remain for six years. Every time prospective lenders look into your credit history, they’ll see it. There’s nothing you can do to remove it.

Some lenders – usually the high street variety – will reject a mortgage application if a payday loan appears anywhere in the borrower’s credit file, regardless of how long ago they took it out.

Other lenders, particularly those specialising in bad credit mortgage eligibility, may ask you to give them some contextual background on why you needed the loan. If you provide a reasonable response, a specialist lender will approve your mortgage application even if you took out a payday loan that same month.

Do payday loans affect your credit rating?

Contrary to what you might believe so far, a payday loan won’t damage your credit score – provided that you make your repayments on time. If anything, they could help improve it by building a credit history of on-time payments.

On the flip side, you may have a good credit score, but a lender may reject your application solely based on having a payday loan in your history. It’s not so much the loan itself but the contempt they draw from lenders.

Many high-street mortgage providers disapprove of payday loans. To them, a borrower taking out finance – even in an emergency – against their wages is an extremely risky move, regardless of how fast they paid off the loan. That’s a risk they’re generally unwilling to absorb.

Lenders consider several factors when determining whether or not to approve a mortgage application. A borrower’s credit rating is just one of many requirements that must align. Some providers have internal scoring systems and policies that automatically exclude borrowers with a payday loan in their credit history, regardless of their credit rating.

If you have a payday loan in your credit file, your best bet would be to consult with an experienced mortgage broker who is well-versed in the bad credit lending market. They know which lenders will likely approve your mortgage application even with a payday loan in your credit history.

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How long after a payday loan should you wait before applying for a mortgage?

The relevance of a payday loan to your mortgage application has little to do with timing. Some lenders will approve a mortgage application even with an open payday loan in the borrower’s credit file. Others would reject an application outright if a payday loan appears anywhere in the credit history, even if they took it out more than five years earlier.

If you approach the right lender, typically one that deals with high-risk borrowers, you can secure a mortgage regardless of how recently you took out a payday loan. One of the ways these lenders reduce their risk exposure is by having higher deposit requirements.

More mortgage providers would be willing to approve your application if you can put down at least 25-30% of the property value towards your deposit, effectively lowering your loan-to-value ratio. This means you would have more equity in your home and reduce the risk you pose to the lender. It’s a win-win both ways.

Get expert help from a bad credit broker

Getting a mortgage after payday loans can be quite difficult. You need insider knowledge of the lenders willing to approve you for a mortgage and those who will reject your application outright.

Remember, every rejected application will leave a footprint in your credit file, making it less likely to secure a mortgage with every subsequent try. Multiple rejections from multiple providers tell prospective lenders that you are struggling to get financing, and it might be because you’re high-risk.

A specialist lender or bad credit broker understands the ins and outs of the mortgage market and poor credit. They know the lenders with a high-risk appetite that would approve your bad credit loan application on the first try. Our broker-matching service will connect you to a broker who can help you secure a competitive mortgage deal despite your payday loan use and history.

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Do I qualify for a mortgage after a payday loan default?

A limited number of mortgage providers would be willing to give you a mortgage if your credit history reveals you have a payday loan default in your file. From a lender’s point of view, a borrower who cannot repay short-term debt – which is what a payday loan is – would be even less likely to repay long-term debt – which is what a mortgage is.

A payday loan default in your credit file points to serious financial issues. Most lenders wouldn’t want to take on that risk. The best thing to do would be to speak with a bad credit broker to discuss your credit issues and explore possible lending options.

What can I do if my mortgage application is rejected because of a payday loan?

If your mortgage application was rejected due to a payday loan in your credit history, it is likely because you went through a high street lender. Most mainstream mortgage providers will reject an application outright if the applicant has previously taken out a payday loan, even if they have good credit.

As tempting as it might be to try again with a different provider, the outcome will likely be the same if you don’t know the lender’s attitude towards payday loans. A bad credit mortgage broker has insider knowledge of the lenders that will likely approve mortgage applications from individuals with a history of payday loans. Consult them, and they’ll help you secure a competitive mortgage deal.

What do mortgage companies have against payday loans?

High street lenders will reject your mortgage application if you have a payday loan anywhere in your credit history, regardless of how long ago you took it out. From where they sit, they consider it extremely risky and financially irresponsible for a borrower to take out finance against their wages, even if they repaid it on time.

It tells them they wouldn’t be able to handle the responsibility of long-term debt. This is why most mainstream lenders are unwilling to grant prospective s a mortgage after payday loans.

Contact us now below if you have repaid or are repaying payday loans but want to get a mortgage.

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