You have a bank account with an overdraft facility, just like most people do. But how does using an arranged overdraft impact your mortgage application?
We are currently in a cost of living crisis and being in your overdraft has become more common. Your application for a mortgage will be based on your debt-to-income ratio and overall affordability, not your overdraft status.
In this guide, we will take a look at mortgage eligibility for UK mortgage lenders. We will explore how lenders determine whether to offer you a mortgage or not based in part on your history of overdrafts.
We’ll outline the reasons a mortgage lender might reject your application as well as the steps you can take to satisfy their lending requirements.
So, you’re thinking about buying a house, but you’re worried because you’ve been dipping into your overdraft lately. Don’t sweat it! While using your overdraft isn’t exactly ideal, it shouldn’t automatically disqualify you from getting a mortgage.
Here’s the deal:
- Your credit score won’t be directly affected by being in your overdraft. Your bank account and credit report are separate entities, so using your overdraft won’t magically make your credit score plummet.
- However, your overdraft history can indirectly impact your mortgage application. If you’re constantly overdrawn, it might make lenders think you’re living on the edge financially, which could make them hesitant to approve your loan.
- The good news is that most lenders are understanding about occasional overdraft use. As long as you have a good credit score, a steady income, and a decent down payment, a few overdrafts shouldn’t be a deal-breaker.
Here are some things to keep in mind:
- Lenders will see your bank statements when you apply for a mortgage. So, if you’re constantly overdrawn, they’ll be able to see it. It’s a good idea to try to clear your overdraft before you apply for a mortgage, just to be on the safe side.
- If you have a lot of overdraft fees, you may need to explain them to your lender. You can do this by writing a letter of explanation, which your mortgage broker can help you with.
- If you’ve been refused a mortgage because of your overdraft, don’t give up! There are other lenders out there who may be more understanding.
Here are some tips for getting a mortgage if you’re in overdraft:
- Try to clear your overdraft before you apply for a mortgage. This will show lenders that you’re managing your finances responsibly.
- Get a letter of explanation from your bank. This will explain why you’ve been using your overdraft and what steps you’re taking to avoid doing so in the future.
- Shop around for a mortgage lender. Not all lenders are the same, and some may be more understanding of your situation than others.
- Get help from a mortgage broker. A mortgage broker can help you find the right lender and get the best possible mortgage rate.
Remember, even if you’re in overdraft, you can still get a mortgage! Just be prepared to explain your situation to your lender and be proactive in managing your finances
Here are some additional resources that you may find helpful:
- Haysto: Does Going Into Overdraft Affect My Credit Score?
- FREEandCLEAR: Can Bank Overdrafts Prevent You From Qualifying For Mortgage
- Your bank’s website
Every lender takes a different view on bank account overdrafts
Each bank and building society will have a different view on overdrafts when applying for a mortgage. This will depend on the size of the mortgage you require and the loan-to-value. The higher the mortgage and the higher the loan-to-value, the more the overdraft could affect your borrowing.
Do arranged overdrafts affect credit score?
Your credit score shouldn’t be impacted by an overdraft, but it can be impacted by going over your overdraft limit.
The question, Does applying for an overdraft affect your credit score, often asked is. You will probably be most impacted initially when you take out the overdraft because credit reporting agencies like Equifax and Experian like to see consistency on a credit report.
Click here to learn What credit score is needed to buy a house?
Does an overdraft affect my mortgage application?
FAQ
Do overdrafts affect getting a mortgage?
Can I be denied a mortgage due to overdrafts?
Can I get a mortgage if my bank account is overdrawn?
Does approved overdraft affect mortgage?
Can an overdraft affect my mortgage?
Spending more money than you have available in your checking account is referred to as an overdraft. A bank overdraft results in extra fees, but an occasional overdraft will not affect your current mortgage. If you are trying to obtain a mortgage loan, it is important to keep sufficient funds in your bank account and avoid overdrafts.
Do you need an overdraft to get a mortgage?
Overdraft facilities are available on most bank accounts, and many rarely use them. However, an overdraft can be a cost-effective way to manage financial affairs, especially when you’re on a budget. Nonetheless, constantly using your overdraft can make getting a mortgage difficult.
Does a Bank pay for an overdraft?
Many banks and credit unions offer overdraft protection programs in which the bank or credit union generally pays the transaction and charges you a fee (in addition to requiring repayment of the overdraft amount). Overdrafts can also be covered through a transfer of funds from a linked account, credit card, or line of credit.
What happens if I don’t pay my overdraft?
Failing to pay an overdrawn account can lead to credit and banking consequences. Overdrafts do not affect a mortgage you already have. If your account is overdrawn, pay the required fees and deposit money promptly to bring your account out of the negative.