Virginia Senator Pledges to Combat Predatory Payday Loans
Inside Subprime: Dec 20, 2018
By Nikolas Wright
Do payday loans affect mortgages? The short answer: maybe.
Payday loans alone won’t inherently prevent you from getting a mortgage. However, payday loans can indirectly affect your chances of qualifying for a mortgage, depending on your circumstances. Of course, situations will vary among lenders and borrowers.
Here’s what to take into consideration if you’re dealing with payday loans and a mortgage.
These are two of the most important factors to get a mortgage, among others:
- Your credit history
- Your debt-to-income ratio
Generally, payday loans aren’t reported to the three major credit bureaus, so they’re unlikely to impact your credit score, according to the Consumer Financial Protection Bureau. Payday loans are marketed toward people with low or poor credit histories, which makes them easy to get.
Likewise, payday loans don’t improve credit scores for borrowers, even if they manage to pay them back on time.
But if you’ve defaulted on payday loans in the past, or had them go to a debt collection agency, your credit could take a hit.
Debt-to-income ratio (DTI) is usually the biggest factor a lender uses to determine whether a borrower can pay for a mortgage. That’s because the lenders needs to know whether a borrower can afford to pay back a loan. A mortgage is the biggest debt that most people will ever take on.>
Here’s an example: Say you have a monthly income of $3,000, and you pay $800 in rent, and $400 in monthly credit card bills. That means $1,200 (or 40%) of your income goes toward debt. If your ratio is too high, lenders can deny you a loan or mortgage. A healthy DTI is 30% or below.
In contrast, payday lenders make loans without much regard for the borrower’s ability to pay. That’s how payday loans works: Lenders are first in line for repayment, either by cashing the borrower’s postdated check or directly accessing the borrower’s checking account.
If you have existing payday loans (or other debt like personal loans or title loans) that affect your debt-to-income ratio, you might have trouble qualifying for a mortgage.
In general, it’s best to avoid taking on new debt if you’re preparing to take out a mortgage. Even though payday loans generally don’t move the needle on your credit score, it doesn’t mean you should take one out.
Credit checks, called “inquiries,” tell creditors that you are considering taking on new debt. Such credit checks slightly impact your credit score, but they’re a necessary part of applying for a mortgage. You should only apply for credit when you need it. Avoid applying for a credit card, car loan, or any other type of loan before or during the mortgage application process.
Ideally, if you’re financially able to pay for a mortgage, you shouldn’t be in a position to need a payday loan. But emergencies do happen, and sometimes you need quick cash.