What Are The Mortgage Rules For People With Payday Loans?

You get to the middle of the month and find that your bank account is running on empty. For many people, this is the cue to get a payday loan - it’s easy to obtain a couple hundred quid to tide you over. Then, you simply repay the loan on the day you get paid. However, using payday loans can seriously damage your chances of being accepted for a mortgage, especially if you have them in the few months before applying - even for bad credit mortgages.

Why do payday loans affect mortgage applications with major high street lenders?

When mainstream lenders assess your mortgage application, one of the first things that they check, after your name and address, is your credit score. Using payday loans adds a black mark to your credit file, since they suggest that you are not reliable with your spending or budgeting, which, in effect, lowers your credit score.

Publicly, banks and building societies say that payday loans are treated the same as other unsecured loans, such as credit cards, but the reality appears to be very different. Some lenders will immediately reject borrowers who have used payday loans in the last 12 months. Research by the BBC found that two-thirds of brokers who had clients with a history of payday loans had their mortgage applications rejected. As Jonathan Clark of Chadney Bulgin said, the rejections were “...regardless of their income, the conduct of their accounts and everything else… these were major high street lenders.”

Can you get a mortgage if you have used payday loans?

If you have a poor credit history, there are still lenders who treat your application differently to the draconian ‘fact-based’ methods of the major lenders. These specialist lenders seek to understand you, rather than rely on the credit points you have amassed. A financial mistake can stay on your credit file for six years. Poor credit lenders look beyond the credit score, which may have been affected by a financial error in the past. They want to learn why you have bad credit, and how you manage your finances today. They are most interested in the last 12 months.

If you use a payday loan in the few months before making a mortgage application, it’s an indication that you can’t manage your money very well. It gets worse if you have used payday loans consistently. We may be able to explain a single payday loan eight or nine months ago, but the more you have used payday loans (even if you paid them back on time), the more difficult it becomes, even with specialist poor credit lenders.

What should you do?

If you have used payday loans in the past, you may still be able to get a mortgage. You’ll need to work through a mortgage broker to access the best lenders for your circumstances - most of them won’t accept direct applications. You’ll also need to show that you manage your finances better today than you have in the past. One way to do this is to avoid payday loans, as they are a sign that you find it hard to cope financially and indicate that you overspend and find it difficult to budget. Even if you have a great credit score, a payday loan could scupper your chances of getting a mortgage.

The takeaways are:

• Avoid payday loans

• Find other ways to fill that temporary shortfall between your bank account balance and your spending

• Improve your credit score with these helpful tips

• If you have used a payday loan in the past and want a mortgage now, contact Mortgage Thoughts today. We’ll help you find the specialist lender that will judge you on your merits and not on your credit score alone.