Many hopeful borrowers often worry that having an overdraft will affect their mortgage application. Is it true? Well, that depends.
Contrary to many rumours, having an overdraft won’t necessarily ruin your chances of securing a mortgage. Many of us have an overdraft already included in our bank accounts, and that fact alone won’t cause you any problems. What could affect your application is how big it is, and how often you use it.
Can I get a mortgage if I have an overdraft?
Yes, certainly. Simply having an overdraft facility within your bank account isn’t enough to give you any problems when applying for a mortgage. Nor should it be an issue if you occasionally dip into it but pay it back in full every month. It can even be a good thing because it shows you pay your debts on time and are responsible with your money.
On the other hand, if it’s a particularly big overdraft that you rely on regularly, this could cause some friction. It could give lenders the impression that you’re living beyond your means or having financial trouble – neither of which would fill them with confidence.
What’s the difference between an arranged or unarranged overdraft?
Whether or not you have an arranged or unarranged overdraft could also make a difference to your mortgage application.
An arranged overdraft is an amount you have agreed with your bank in advance and they often come interest-free. Whereas an unarranged overdraft is what happens when you spend more than you have in your current account or you go over your arranged overdraft limit. These often come with high charges.
A well-managed, arranged overdraft of up to £1,000 that you don’t rely on too often is not usually a problem for lenders. They don’t like unarranged overdrafts as much, especially if you’re regularly borrowing thousands of pounds.
If the latter sounds like you, you might want to consider a bad credit mortgage lender with experience in this area and the knowledge help you.
Does having an overdraft affect my credit score?
If you go into your overdraft and are concerned about how it affects your credit score, don’t panic. As long as you’re repaying it every month, your credit score won’t be affected because your bank account and your credit report are not linked.
Your credit score is affected by your debt-to-income ratio. So the only way your credit score can be affected by your overdraft is if you fail to pay it off – this could indirectly and negatively impact your credit score.
Does going into your overdraft affect your mortgage application?
Simply being in your overdraft is usually not enough to negatively impact your mortgage application, especially if you meet all the lender’s other criteria.
Overdrafts show up on your credit report as debt, which makes up part of the information lenders use to assess how reliable you are with borrowing money. If your credit report is showing a lot of debt, i.e., you regularly go far into your overdraft, this won’t reassure the lender that you’re good with your money – even worse if you regularly max out your overdraft. You might find that lenders ask you for an explanation. At worst your application is rejected, or you might simply be offered less money or higher interest rates.
Do mortgage lenders look at overdrafts?
Lenders can see your overdraft through the bank statements they ask you for as part of the application process. This is how they’ll know if you dip into it now and again and pay it back on time, or if you’re regularly and heavily relying on it.
Remember that any overdraft fees you pay will be factored into your affordability assessment as one of your outgoings.
What do I do if my mortgage application is rejected because of my overdraft?
If you’ve been refused a mortgage from a lender because of your overdraft, it’s frustrating, but doesn’t signify the end of the road for you. Just because one mortgage provider rejected you, doesn’t mean the next one will.
But before you try again, consider getting some advice from a mortgage broker. Too many unsuccessful mortgage applications can negatively affect your credit report, which will then make it even harder for you on the next application. Here is what you should do instead:Speak to a lender
There might be an easy fix for your rejection, like approaching a different lender. A broker can help you understand which are the right lenders to approach and they can help you with your application to give it a fighting chance.
Don’t go over your overdraft limit
In the meantime, try and stay inside your overdraft limit. Lenders are much more comfortable with arranged or authorised overdraft limits. If you need to cut back on other expenses to be able to stay within the limit, maybe look at unused subscriptions or memberships. Do you really need all four of those streaming platforms?
Combine your debt
If you need extra money, think about borrowing it in a different way. Perhaps one personal loan would make it easier to manage the debt and could have more manageable interest charges. Taking out one loan and paying it back in full and on time shows more a little more financial responsibility.
Using your overdraft doesn’t have to ruin your chances of getting a mortgage. You might simply need to approach a specialist lender who isn’t put off by your overdraft use.
If you’re regularly using your overdraft, a mortgage broker can help you find that specialist lender and improve your chances of being accepted.
At The Mortgage Hut, we have a team of specialist brokers who are experienced in helping borrowers with large overdraft use secure their mortgage through our network of specialist lenders. Don’t let your overdraft stop you – get in touch today and jump back into your home buying journey.
FAQs
Can you use an overdraft towards a deposit?
No. Lenders don’t love it if you have to borrow money to get a mortgage because they prefer to be the only major debt you’re tied to.
Do overdrafts count as loans?
Yes, regardless of whether your overdraft is arranged or unarranged, it counts as a loan. Always make sure you’ll be able to pay it back, including any additional fees or interest.
Can an overdraft stop you from getting a mortgage?
Simply having an overdraft won’t stop you from getting a mortgage, but if you have a particularly large one or you rely on it heavily, this could cause you problems or even be enough to get your mortgage application declined. Speak to a mortgage broker for advice if you’re worried about the impact your overdraft will have on your mortgage application.
Do underwriters look at overdrafts?
Yes, mortgage underwriters will look at your bank statements to assess your money habits and level of risk before agreeing to approve your loan, and any details of your overdraft will appear on those bank statements.
