How Payday Loans Can Affect Getting a Mortgage
Millions of people turn to payday loans because they have emergencies like fixing a car or paying for rent. Payday loans are very convenient and seem to be a good solution at the time. But, sometimes, these short-term solutions do long-term damages that can affect getting a mortgage.
What Is a Payday Loan?
A payday loan is a short-term loan repaid at the borrower’s next payday. They are designed to help you meet unexpected expenses when you don’t have enough money in your bank account. However, they should not be used as a long-term financial solution. Because they’re designed to be repaid quickly, they can become expensive if you have to renew them.
Most payday lenders do not check your credit history before deciding whether to make a loan. So, even with poor credit, you may still qualify for a payday loan.
What Is a Mortgage?
A mortgage is a loan that allows you to purchase a property. It involves borrowing a certain amount from a lender and agreeing to pay it back with interest over time. The lender will hold the title to your home until the mortgage debt has been repaid.
Suppose you’re planning on buying a home. In that case, knowing how having payday loans might affect your ability to get approved for a mortgage is essential.
Payday loans can affect your ability to get a mortgage in two ways:
- Loan pricing adjustments. Suppose you have low credit scores due to payday loan borrowing. In that case, it will be reflected in the interest rate you are offered on any subsequent loans. The higher your score, the lower the interest rate you will be given by lenders.
- Loan qualification requirements. You may find that some lenders will not give you a loan because you have applied for or received a payday loan within the last year or two years.
Let us now examine these factors in detail.
Getting a Mortgage with Payday Loans
There are many questions surrounding payday loans and how they work. Still, the most important is: How do they affect getting a mortgage?
The answer is that it depends on several factors, such as:
Your Credit Score
If you’ve ever taken out a payday loan, you know it can be a quick way to get cash. And if you’re not careful, it can also put a big dent in your credit score.
Your credit score is a number that lenders use to determine whether they’ll give you a loan and how much they’ll charge you for it.
Will the Payday Loan Affect My Credit Rating?
Yes, it can. Many lenders consider a payday loan a “high-risk” loan because they charge extremely high-interest rates and offer no collateral as security. Payday loans are also unsecured and therefore do not require any collateral to secure them.
Your lender may view this as risky behavior and decide that you are likely to default on other debts, such as your mortgage payment.
Your Payment History
Your payment history is one of the most important factors when getting a mortgage. If you have late payments or, even worse, if you’ve gone into default, this will affect your credit score and make it difficult to secure a mortgage.
Payday loans can affect your ability to get a mortgage if they appear on your credit report. The main factor is whether you paid the loan back on time. If you pay it back late, this will damage your credit score.
Lenders want to know that you are reliable and responsible with money. For example, paying back a loan shows them you’re good at managing money and handling debt. However, suppose they see you borrowed money and didn’t pay it back. In that case, they may not believe you’re capable of managing their mortgage responsibly.
Can I Still Get a Mortgage if I Have an Outstanding Payday Loan?
The answer is yes. You can still apply for a mortgage. But, the lender will want to know what kind of loans you have, how much you owe, and when they are due. They may also need to see proof that you have been making payments on time.
Your Debt-to-Income Ratio
Your debt-to-income ratio is a measure of how much debt you have compared to how much you earn. If you’re applying for a mortgage with a lender, they will want to know if you can afford the monthly payment. A high debt-to-income ratio may cause problems with getting approved for a loan.
How Payday Loans Affect Your Debt-to-Income Ratio
Payday loans are a popular form of financing for people needing extra cash. They can be used to pay bills and other expenses but can also create more debt if they are not paid off in time.
The lender will look at your income and outgoings when you apply for a mortgage or refinance your home loan. Therefore, you will be required to provide them with a detailed breakdown of all your finances, including how much you earn and what you spend. The lender will then use this information to calculate your debt-to-income ratio (DTI).
The DTI is calculated by dividing your total monthly debt payments by your gross monthly income (before taxes). Having a high DTI may affect whether or not you’re approved for a mortgage loan.
Payday loans are a quick and easy way to get cash in an emergency. But they can also be expensive and affect your ability to get a mortgage.
If you’re looking for a loan, do your research and go with the lender with the best rates and terms for your situation.
At Slick Cash Loan, we connect potential borrowers with lenders from our network of lenders. This allows us to provide our customers with a wide range of options when it comes to finding a lender who will work with them based on their current credit rating, income level, and other factors that affect their eligibility.