When you’re making a property purchase in the UK, the mortgage application process can be nerve-wracking. Lenders are scrutinising your finances and considering many variables, including “what-ifs,” when making an assessment. In this intense environment, how can a simple overdraft affect your application’s chances?
Type of Overdraft
The short answer is that it depends. In general, an overdraft isn’t an automatic write-off for an applicant. But depending on the type of overdraft and frequency, it can leave a definite stain on your approval chances.
You should first know that there are two different kinds of overdrafts: authorized and unauthorized.
- Authorized means that the bank knew about and agreed to it.
- Unauthorized drafts were not approved by the bank.
This comes into play when considering if it counts against your application. Lenders are looking for reliability when it comes to who they give money to. They want to know the person on the other end will be able and willing to pay them back. They take into account details large and small.
What does your overdraft say about you? While having an overdraft on your account might not be the most impactful activity a lender looks at, trends like frequent unauthorized overdrafts can put you in the unreliable category. It can suggest to them that you are on a tight budget and might not be able to take on a mortgage.
The other issue with overdrafts is that, if you use it often, you are probably getting charged interest and fees from the bank. The lender adds this to how much you spend every month to determine how much is left over to afford your mortgage.
Even unused overdrafts can affect your overall assessment. If lenders see that you are granted a big overdraft from your bank, they may take into consideration the fact that you could use it in the future. Depending on the state of your finances, they might determine you won’t be able to make your mortgage payments.
Of course, overdrafts are not a death knell for your chances. Circumstances in your life could explain the overdrafts, like a new career. If a lender can explain the overdrafts, it is more likely they will approve. This all gets incorporated into their considerations.
What If You Were Declined?
You finally got the word from your lender, and they told you exactly what you were dreading: you have been declined. Where do you go from here?
First, you need to find out what happened. You can find out from your lender not only whether your overdrafts were a key factor, but what about them was a red flag. Ask lots of questions. You can use this information going forward when you want to apply again.
Your next option could be to speak to an adviser or mortgage broker. This person has a knowledge of which lenders you can go to based on your unique situation. This increases your chances of having a successful experience with your next application.
Applying for your mortgage is a stressful experience with so many unknown variables. The results are in the hands of someone whose determination is based on individual assessment. With an overdraft, you don’t have to worry about it being the end of your application; but even if it is, there are steps you can take moving forward.