Just like the majority of people, you have a bank account with an overdraft facility, but does using an arranged overdraft affect your mortgage application?
We are currently in a cost of living crisis and being in your overdraft has become more common. Being in your overdraft doesn’t mean you won’t be accepted for a mortgage, it comes down to your overall affordability and debt-to-income ratio.
In this guide, we will take a look at mortgage eligibility for UK mortgage lenders. We will delve into how lenders take an overdraft into consideration when they decide on whether they will offer you a mortgage or not.
We will set out the reasons why a mortgage lender may decline your mortgage and also what you can do to meet the lenders’ mortgage lending criteria.
Does Being in Your Overdraft Affect Mortgage Applications?
The way you use your overdraft may affect your mortgage approval, including the amount you’ll be able to borrow. However, having an overdraft will not stop you from getting a mortgage. Most mortgage lenders will not turn you down for a mortgage as long as you do not have an over-reliance on the overdraft.
When will an overdraft affect your mortgage application?
Most people these days have an authorised overdraft facility on their bank accounts. Even when opening a bank account most banks will open the account with an agreed overdraft. So don’t panic!
However, there are some common scenarios where an overdraft is likely to affect a mortgage application with the majority of mortgage lenders.
1) If you’re over the agreed overdraft limit
If you are over your authorised overdraft limit this is very likely to affect your chances of getting a mortgage. This is because how you are with money and credit it is a major factor that most mortgage lenders will take into consideration when deciding whether to offer you one.
When you get a mortgage, you are asking a mortgage lender to lend you a considerable amount of money. If you are going over your overdraft or have an unarranged overdraft you are telling the financial world that you are more than likely struggling financially and therefore most banks and building societies are likely to turn you down.
2) If you have a particularly large overdraft
This will make a big difference in any decision made by mortgage lenders. If you have a standard £100 overdraft given with the bank account on opening this will have no effect on you getting a mortgage as long as you are not going over your overdraft limit.
If you have a larger overdraft for example £5,000, lenders will look at the way you are using your overdraft every month and the overdraft fees in much greater detail. If you are using it each month and you are close to your limit this will worry lenders and may cause you problems.
3) If you’re regularly in your overdraft
If you are constantly in your authorised overdraft each month and the lender is still willing to offer you a mortgage, how this sits with your credit profile may still affect you. Lots of lenders may take the overdraft as a regular credit commitment and therefore it could reduce the amount they are willing to lend.
4) If you’ve recently increased your overdraft
If you have recently increased your authorised overdraft, lenders will assume that you may have had recent financial problems, which is why the overdraft is increasing.
How does an overdraft affect getting a mortgage?
Having an unauthorised overdraft will affect your chances of getting a mortgage. It will be seen by mortgage providers that your finances may not be under control. It can be complicated at some banks do offer an unauthorised overdraft even though you haven’t applied for it at a higher interest rate.
When you submit a mortgage application the lenders will look at your banking habits and you will be strongly putting the odds to your advantage if you are showing clearly that you have your finances under control.
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.
How many months’ bank statements will mortgage lenders look at?
Each bank and building society will vary on how many months bank statements they will need to see when applying for a mortgage. The average amount of months looked at is 3 months however quite often it can be as many as 6 months of bank statements that they ask for.
If there are two people who are due to be named on the mortgage, they will want to look at both mortgage applicants’ bank statements.
Learn what information you will need to provide mortgage lenders when you get a mortgage.
What else will lenders look for on my bank statement?
When applying for a mortgage the reason lenders want to see your bank statement is to check that the amount on your payslip matches the amount you get paid. It is proof of your earnings.
The lender’s underwriter will now be able to see all your financial transactions for the last 3 months, therefore be ready to explain any regular payments and also any payments that may affect your mortgage application.
Stop worrying and take action!
The maximum amount of monthly bank statements a lender will look at is 6 months, therefore the worst-case scenario is that it will take 6 months to get your bank account and overdraft in order. Get out of your overdraft and then reduce the overdraft to a lower level.
Do arranged overdrafts affect credit score?
Being in your overdraft shouldn’t affect your credit score however being over your overdraft limit can affect your score.
The question, Does applying for an overdraft affect your credit score, often asked is. Companies like Experian or Equifax love to see consistency on a credit report therefore you are likely to be most affected initially on taking out the overdraft.
Click here to learn What credit score is needed to buy a house?
Does an overdraft improve your credit rating?
Getting an overdraft will not improve your credit rating! In fact, credit scoring companies do not like any change in finances so your score will initially drop when taking out any debt however over a few months once you have shown the ability to show debt repayments it can have a positive effect on your score.
We would advise that after taking on any credit card debt or a personal loan as well as taking out an overdraft you check your credit report for a few months.
Working With a Mortgage Broker
If you have been deep into your overdraft facility or have a large overdraft but need to get a mortgage sorted out sooner rather than later, don’t panic!
With over a hundred different banks and building societies and with over 14,000 different mortgages available there will be a mortgage provider for you.
When applying for a mortgage speak to a whole-of-market mortgage broker that can help you. A UK fee-free mortgage broker will have experience with all the different banks and building societies and therefore will be able to find a lender that will be happy with your financial profile.
Many people leave arranging a mortgage deal to the last minute. You may have found your dream home and are now panicking about how to find the right mortgage with a great interest rate!
You may need a larger mortgage deposit if you have a large overdraft. If you are over your arranged overdraft limit there is a very strong chance that a larger mortgage deposit may be needed.
Your existing deal with your lender may be coming to an end and you may have left it to the last minute to sort out a new deal. Don’t panic! YesCanDo Money is a whole of market free mortgage broker with access to the best mortgage rates.
- Learn what stops you from getting a mortgage
- Discover how much mortgage you can get.
- A guide to bank statements for a mortgage
Fee Free Mortgage Advice from YesCanDo
Here at YesCanDo we are a whole-of-market no-fee mortgage broker. Being one of the UK’s largest mortgage brokers, we have a team of very experienced mortgage advisers here to help.
We understand that your mortgage repayments need to be affordable and that is why our mortgage advisors will spend time to fully understand what you are trying to achieve and what is important to you.
YesCanDo is a whole of market broker we search the whole UK mortgage market to find you the mortgage lender with the very lowest interest rate. We help you through every step of the mortgage application process and mortgage process including arranging a survey, talking to your estate agent and solicitor, and seeing the mortgage through to completion.
So, pick up the phone or drop us an email, and let’s see what we can do to help you!
Frequently Asked Questions
Is it bad to use arranged overdraft all the time?
Relying heavily on an arranged overdraft could signal to lenders that your finances are out of control, suggesting you lack effective money management skills.
Do banks like you using your overdraft?
Banks provide overdrafts as a service; occasional use may not raise any concerns but regular reliance may indicate trouble in your financial life.
Can an overdraft stop you getting a mortgage?
An overdraft won't prevent you from qualifying for a mortgage loan; however, its excessive use may make lenders nervous.
Do underwriters look at overdrafts?
Yes, underwriters review your bank statements (including overdraft usage) to assess your financial behavior and risk before providing approval of a loan application.
