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Yes, it is certainly possible to secure a mortgage after using a payday loan. However it does depend on the mortgage lender.

Some lenders take a more liberal view of a customer taking out a payday loan, if it was sometime in the past, and repaid in full and on time. However, some are known to decline customers who have recently used a payday loan. While others even choose to decline if a payday loan shows up at all in a customer’s credit history over the past six years.

In spite of this, it is still possible to get a mortgage after using payday loans, since the lender may be able to see that you have paid them off in full within the agreed timeframe. In this guide, we will look at both payday loans and mortgages, and how they might affect each other. 


What is a Payday Loan?


Payday loans are high-interest, short-term loans which are designed to be used by the borrower until their upcoming payday. They are typically for small amounts, whether you want to borrow $500, borrow $600, or even thousands.

Online payday loans are generally designed to be used only in emergency circumstances, for example to cover the cost of an unexpected medical or auto bill. They should not be used for any unnecessary spending, or taken out to help repay alternative loans.

In order to apply for a payday loan, you will need a valid ID, a regular source of income, and a valid bank account. After applying for a payday loan, you can be approved and have the funds deposited in your account as quickly as the very same day, meaning they can be particularly useful in an emergency situation. 


What is a Mortgage?


A mortgage is a financial agreement between a borrower and lender that allows the borrower to purchase a property while spreading out the cost over an extended period. It is a type of loan specifically designed for real estate purchase, wherein the property being purchased acts as collateral for the loan. The lender, usually a bank or financial institution, provides the required funds to the borrower, enabling them to purchase the property.


How Do Payday Loans Impact Your Chances of Getting a Mortgage?


The key way in which payday loans impact on your chances of getting a mortgage is that they potentially impact your credit history. Credit history is a crucial factor that lenders consider when evaluating mortgage applications. A borrower’s creditworthiness is reflected in their credit report and score, which provide insights into their past financial behavior. Payday loans can impact credit history and potentially lower credit scores, therefore affecting the chance of securing a mortgage.

This is because if an individual was to borrow a payday loan and fail to repay it on time, their repayment history could be reported to credit bureaus and subsequently negatively affect their credit scores. Late payments, defaults, or loan rollovers associated with payday loans can significantly reduce creditworthiness in the eyes of mortgage lenders.

Furthermore, lenders also consider a borrower’s debt-to-income (DTI) ratio. This compares monthly debt obligations to their income. Payday loans can contribute to higher DTI ratios, as they add to the borrower’s existing debt burden. A higher DTI ratio could raise concerns for lenders, as it suggests a higher risk of default on mortgage payments. 


How Do Payday Loans Impact Your Chances of Getting a Mortgage?

Do Mortgage Lenders Take Into Account Payday Loans When They Carry Out A Risk Assessment?


Mortgage lenders do take into account payday loans when they carry out a risk assessment. Payday loans can influence lenders’ perceptions and risk assessments in several ways, potentially impacting mortgage eligibility. The ways in which payday loans can impact risk assessments include:

  • Negative Perception. Lenders could see payday loans as a red flag, signalling financial instability or poor money management skills. Reliance on short-term, high-interest loans can suggest that borrowers will have difficulty managing long-term financial commitments such as a mortgage. This perception may lead lenders to question the borrower’s ability to make timely mortgage payments.
  • Risk of Default. Payday loans often have strict repayment terms, and the consequences of defaulting on these loans can be serious. Lenders may perceive with a history of payday loan defaults as high-risk applicants, as it indicates a pattern of financial instability. In some cases, this perception may result in lenders rejecting mortgage applications, or offering less favorable terms, such as higher interest rates or stricter borrowing conditions
  • Debt Repayment Capacity. Lenders also analyze a borrower’s ability to repay the loan based on both income and existing debt obligations. Payday loans, with their high interest rates, can increase the borrower’s overall debt burden, and thus affect their capacity to manage additional financial commitments. Lenders may be hesitant to provide a mortgage if they believe that the borrower’s payday loan hampers their ability to meet mortgage payments. 


How Long Does A Payday Loan Stay On My Credit History?


Your credit history and credit score shows any borrowing you take, or payments you miss, over the last six years. The older the registration date of the payday loan, the less impact that it will have on any new mortgage application.

However, as mentioned above, some of the stricter lenders will decline your application if you have ever taken out a payday loan, while others accept use of a payday loan right up until the current month, if it can be explained. 

The length of time that you have to wait to apply for a mortgage after taking out a payday loan depends largely on the loan-to-value (LTV) ratio of the mortgage. Generally, the more deposit/equity you have, the better chance you have of being approved for a mortgage. 


Can I Lessen the Impact of Payday Loans When Trying to Secure a Mortgage?


Yes, this is certainly possible. While payday loans can negatively affect mortgage applications, borrowers can take certain measures to mitigate their impact and enhance their chances of securing a mortgage. Some measures that a borrower can take include:

  • Improving Credit Score. Borrowers should focus on improving their credit score by making timely payments on all outstanding debts, including payday loans. Borrowers can also improve their creditworthiness by regularly monitoring their credit reports for errors, and promptly rectifying them.
  • Demonstrating Financial Stability. Lenders value stability and consistency in financial matters. Establishing a stable employment history, maintaining a healthy savings account, and showing responsible financial management can help offset the negative impact of payday loans. 
  • Reducing Debt Burden. Payday loans contribute to debt obligations, which can adversely affect a borrower’s DTI ratio. Prioritizing repayment of debt and reducing overall debt burden will enhance the borrower’s eligibility for a mortgage. Consider exploring debt consolidation options or creating a repayment plan to efficiently manage and reduce debts.