Effect of overdraft on mortgage application

jazzyja

hi all, what effect does being in your overdraft have on applying for mortgage? I have a £500 overdraft. Usually once a month I go into it by £100 or so. This is just because things come out before my wage. Im probably in it about a week. But i always clear it in full every month. My mortgage advisor said it shouldn't have an effect if im clearing the balance every month and I'm not using over 50% of it. If it doesn't look great is it worth me trying to get abit of a buffer so I don't go into it? I will have some credit cards paid in the next few months so that will help in terms of how much outgoings i have but right now i am using it. Thanks 

[Deleted User]

Being in your overdraft tells lenders you have no spare cash and are therefore unable to weather any temporary money issues.

If you're applying for a mortgage, you need to at least give the impression you have more than 20p in the bank.

Get out of it and stay out.

CreditCardJunkie

Depending on amounts the credit cards could be an issue

jazzyja

CreditCardJunkie said:

Depending on amounts the credit cards could be an issue

Theyl be clear by the time I apply

beth85

I bought my house in March. Before then I religiously checked this forum to get some reassurance I’d be able to get a mortgage. To be honest most responses made me nervous that I’d never own a home. Turns out it’s not actually that hard, I went to my mortgage broker with £13k worth of credit card debt, a £20k car on PCP and I regularly dipped into my O/D but I had 10% deposit and a perfect credit history. I got a high street mortgage with no issues at all.  However I also didn’t stretch myself and purchased a property £70k under what they were willing to offer.  Good luck!

jazzyja

beth85 said:

I bought my house in March. Before then I religiously checked this forum to get some reassurance I’d be able to get a mortgage. To be honest most responses made me nervous that I’d never own a home. Turns out it’s not actually that hard, I went to my mortgage broker with £13k worth of credit card debt, a £20k car on PCP and I regularly dipped into my O/D but I had 10% deposit and a perfect credit history. I got a high street mortgage with no issues at all.  However I also didn’t stretch myself and purchased a property £70k under what they were willing to offer.  Good luck!

Thankyou so much for this. I must admit (this is nothing against majority of individuals on this forum) alot of what I've read really scares me. I think crikey il never do this. Im trying SO hard. And it never feels good enough. My credit file is perfect for the last 3 years. I do have some cards that I'm currently doing overtime to pay off. My car is financed but I'm going to just pay that as normal. Im finding some of the advice my broker has given me is contradictory to some things said on here and I start to worry. Yes im definitely going with the same as you and not stretching myself. Im looking at 100k tops. Aiming for a 12k deposit. Im not yet looking as I haven't got all my deposit. I keep myself awake at night just dreaming!! Driving me insane. Thankyou and congrats on becoming a homeowner  

[Deleted User]

I used to work in lending on mortgages until recently (moved around now).

The problem with mortgages is that it's risk based and sometimes it's about perception. Maybe it shouldn't be, but it's an individual (or group of individuals) underwriting - it's not a tick box exercise, so judgement is involved - otherwise, they'd just use a computer program (a lot cheaper!).

It's not necessarily a negative to be in your overdraft. Likewise if you've got £10,000 in savings, that should help - but it may appear better if that £10,000 was in your current account. It's not best use of funds (e.g. low interest rate) and I certainly wouldn't move it there just for the mortgage application (as that looks suspicious) but just as everyone has "first impressions" of somebody, I would describe lending as being similar.

If I saw a first time buyer £4,000 overdrawn, straight away that would have raised serious concerns - whether it would get declined or not is a different matter (and depends on the entire case). Next application a FTB could have had £1 in their current account but £4k on a credit card and no eyebrows would be raised. In some respects, the system is unfair.

But what zx81 says is still factually correct - it does indicate that you don't have any money. If you had the money, why are you paying OD fees? If it's an interest free overdraft there's a theory of using/abusing it, but if not then it does suggest you don't have any spare money - therefore, arguably, you are slightly higher risk.

However - saying all of that - many people get approved daily despite being hundreds of pounds (sometimes thousands - although unlikely for first time buyers!) into their overdraft.

From the wording of your latest post it sounds like you've had credit issues in the past? Not judging you (I did years ago) but underwriting in general is judgemental and they very rarely will know the customer and their situation (e.g. were they overdrawn or did they miss a payment due to a tragic event in the family, or can they just not manage their money?).

They need to judge how you're going to pay. If you've had past issues, that's a negative against you... if you're in your overdraft, that might be another... if you are a first time buyer that could be another and high LTV could be another.

Decisions should be checked and training given to ensure it's fair and consistent - but on it's own, factually being out of the overdraft will appear better than being in it. Will it stop you getting a mortgage? On it's own - no (unless it makes you fail affordability, which is unlikely at such a low level). But combined with other risk factors, it could be "the straw that breaks the camel's back".

In terms of things coming out before payday - can you shuffle the dates around? Many credit cards will let you amend the due date to be just after payday, that might help.

Best of luck with the mortgage process, I really do appreciate how hard and frustrating it can be - and also how everyone will give different advise (e.g. don't gamble, don't be in your overdraft, don't use more than x% of your credit limit) - but ultimately it does come down to the people looking at your case. 

For what it's worth, I've given mortgages where people were up to their credit limits, overdrawn and gambling... as it depends on the overall justification to proceed with the case! If there are more positives than negatives and no significant issues of concern, then the case should go through 

jazzyja

Somerset_La_La_La said:

I used to work in lending on mortgages until recently (moved around now).

The problem with mortgages is that it's risk based and sometimes it's about perception. Maybe it shouldn't be, but it's an individual (or group of individuals) underwriting - it's not a tick box exercise, so judgement is involved - otherwise, they'd just use a computer program (a lot cheaper!).

It's not necessarily a negative to be in your overdraft. Likewise if you've got £10,000 in savings, that should help - but it may appear better if that £10,000 was in your current account. It's not best use of funds (e.g. low interest rate) and I certainly wouldn't move it there just for the mortgage application (as that looks suspicious) but just as everyone has "first impressions" of somebody, I would describe lending as being similar.

If I saw a first time buyer £4,000 overdrawn, straight away that would have raised serious concerns - whether it would get declined or not is a different matter (and depends on the entire case). Next application a FTB could have had £1 in their current account but £4k on a credit card and no eyebrows would be raised. In some respects, the system is unfair.

But what zx81 says is still factually correct - it does indicate that you don't have any money. If you had the money, why are you paying OD fees? If it's an interest free overdraft there's a theory of using/abusing it, but if not then it does suggest you don't have any spare money - therefore, arguably, you are slightly higher risk.

However - saying all of that - many people get approved daily despite being hundreds of pounds (sometimes thousands - although unlikely for first time buyers!) into their overdraft.

From the wording of your latest post it sounds like you've had credit issues in the past? Not judging you (I did years ago) but underwriting in general is judgemental and they very rarely will know the customer and their situation (e.g. were they overdrawn or did they miss a payment due to a tragic event in the family, or can they just not manage their money?).

They need to judge how you're going to pay. If you've had past issues, that's a negative against you... if you're in your overdraft, that might be another... if you are a first time buyer that could be another and high LTV could be another.

Decisions should be checked and training given to ensure it's fair and consistent - but on it's own, factually being out of the overdraft will appear better than being in it. Will it stop you getting a mortgage? On it's own - no (unless it makes you fail affordability, which is unlikely at such a low level). But combined with other risk factors, it could be "the straw that breaks the camel's back".

In terms of things coming out before payday - can you shuffle the dates around? Many credit cards will let you amend the due date to be just after payday, that might help.

Best of luck with the mortgage process, I really do appreciate how hard and frustrating it can be - and also how everyone will give different advise (e.g. don't gamble, don't be in your overdraft, don't use more than x% of your credit limit) - but ultimately it does come down to the people looking at your case. 

For what it's worth, I've given mortgages where people were up to their credit limits, overdrawn and gambling... as it depends on the overall justification to proceed with the case! If there are more positives than negatives and no significant issues of concern, then the case should go through 

Hi, thankyou so much for your detailed reply. I genuinely (embarrasingly) didnt know so much went into mortgage approving. And I think its maybe something I need to read up about. 
Explaining it like that makes sense. I always looked at it as "I can afford all this rent they can see I can afford a mortgage" but its rise in % etc, I get it. Its taken me a few weeks but I get it. I've been working a ton of overtime to get my income up to save but also to higher my chances of getting a decent LTV as il only have 10% deposit. So every penny ive made has gone straight into savings so I have legit zero in my account (not in my OD though yay). My next bit of overtime money I will keep in my account so im not dipping into my OD. I do have money, I'm just frantically saving and trying to pay off my cards.
I have had rubbish financial history yes I dont have anything dramatic like ccjs etc. I have missed payments, but these are 3 years ago when I was at uni. So anything from 2016 backwards is poor. But last 3 years I've tried hard. Only debt il have from august is my car which i have 9k left to pay. I wont be applying for a mortgage till may next year as I cant cash out my lisa before then. Im so desperate. I barely spend anything anymore. The house im living in is really getting me down and my landlord is awful. I'm doing well on the saving side. I've fingers and toes crossed il get there eventually! Thanks again 

Fighter1986

It's alright to take a little longer to save and clear debt. Take your time over doing something properly, without killing yourself in the process.

Aim for 15% down, no debt, and enough extra in the bank to ensure you can cover moving costs and all the niceties you'll want when you move. Don't worry how long this will take.

Allow yourself the breathing space