An overdraft can be a great way to access immediate extra funds if you’re running low. If managed correctly, using an overdraft is a relatively low risk way of managing your finances with a little bit of backup.
However, customers often worry that having an overdraft will affect their mortgage application, asking questions such as ‘does my overdraft show up on a credit report?’. We’re here to answer all your questions, and help you to understand whether, and how, an overdraft can affect your mortgage application.
The financial details mortgage lenders look at
Mortgage lenders will assess a number of financial details when deciding whether or not to offer a mortgage:
- Credit history
- Income
- Bank statements
- Loans
- Overdrafts
Your mortgage credit check won’t necessarily make or break your application, but it might increase/decrease your chances of an application being accepted. Equally, you’re likely to be offered a better deal if your credit check is favourable. Having poor financial history, such as late loan repayments or repeated unarranged overdraft entries, will make it more difficult for you to get the mortgage offer you’re hoping for.
Does an overdraft show up on a credit report?
An overdraft usually shows up on your credit report as a debt. It will show whether you’ve previously entered unarranged overdrafts, or if you currently have an arranged overdraft. It will also show what your arranged limit is and how much of that you are using.
This won’t always necessarily work against you though. In some cases, if it’s evident that you’ve used your overdraft responsibly and regularly paid it off, this might actually help your case when applying for a mortgage.
Will an overdraft affect your mortgage application?
Simply having an overdraft shouldn’t negatively impact your mortgage application. Overdrafts are very common in current accounts and, provided they aren’t being used in a way which regularly overstretches your finances, you should be ok.
Equally, it’s important to consider the impact of an arranged overdraft vs an unarranged one. An arranged overdraft is one which has been pre-agreed up to a certain amount, whereas an unarranged one has not been agreed with your bank. Both can incur fees, but an arranged overdraft is lower risk and often gives much more time to pay off your debt. This would look more desirable on a mortgage application.
How overdraft use can affect your mortgage application
Whilst an overdraft alone probably won’t impact your application, there are some situations that might have an effect:
- Maxing out overdraft – If you regularly max out your overdraft, it could be an indicator of financial instability.
- Consistent dependence on overdraft – If you consistently use your overdraft to pay bills, this might also be a sign of financial trouble, which may put a lender off offering you a mortgage.
- Incurring fees for going over limit – Whilst using an arranged overdraft responsibly usually shouldn’t be a problem, if you go over the agreed limit, and incur additional fees, this might work against your case.
Does the size of an overdraft affect a mortgage application?
Having a very large overdraft might affect your mortgage application, as it suggests that you may not have the income or cashflow to repeatedly keep up with mortgage repayments.
Even if you’re rarely using your large overdraft limit, a lender may feel it’s an indication that you intend to at some point, meaning that your finances may not be particularly stable.
However, it’s important to note that smaller and even medium overdrafts should not negatively impact your mortgage application.
Should you get out of your overdraft before applying for a mortgage?
From an eligibility perspective, there’s no real reason you’d need to get out of your overdraft before applying for a mortgage. As mentioned, assuming it’s well managed and not overused, it probably won’t harm an application.
However, from a financial perspective, we’d recommend getting out of your overdraft, or at least reducing it, before you apply for a mortgage. This is because applying for a mortgage means you’re signing up for one of the largest financial responsibilities you’ll ever have. As a result, it’s strongly recommended that you are in a good financial position.
Can you get a mortgage if you have an overdraft?
You can get a mortgage with an overdraft, especially with the help of a mortgage advisor working with you. We’ll assess your current and previous financial situation and explain what might impact your application, and what you shouldn’t worry about. For example, if you have used your overdraft responsibly over a period of time, we’ll explain to you the benefits of slightly decreasing it before you make an application.
Barlow Irvin advises upon the best course of action in the process of buying a home. With our expertise, you can rest assured that your mortgage application stands the best possible chance of success, with a good rate too!