House hunters have all sorts of questions about loans and credit. For those who have utilized payday lending services, the question may arise: how will a payday loan affect my home loan approval? Although payday advance lenders do not require an individual to pass a credit check prior to borrowing, these types of loan can affect one's credit if not treated responsibly. Some payday loan lenders may report negligent borrowers to the credit bureaus; thus, to keep one's credit intact, a borrower must pay back their loans on time and in full.
When looking to buy a home, every credit mishap and inquiry matters. The benefit of a payday loan aside from other loans is that no credit inquiry is made when borrowing. Because credit inquires affect credit scores, the fact that payday lenders do not inquire is advantageous for potential home buyers. However, not paying off a payday advance can cost a house hunter a home loan, as it will seriously damage one's credit score.
Due to the irresponsible mortgage lending practices of many major banks in 2007 and 2008, the government has tightened up on loan regulations, making it more difficult for a buyer to acquire a loan. While stringent government regulations are in place to protect buyers, they can also easily turn the home buying process into one big headache. This is particularly true for those with less-than-perfect credit and/or high debt ratios. Thus, keeping one's credit clean is the first step to home ownership. If one's credit is already damaged, home ownership might still be an option, with a little patience.
FHA loans are some of the most popular mortgages on the market. However, obtaining this type of low interest, federal home loan takes a little care. FHA loans generally require at least a year of good standing credit history, free of any late or non-payments. If a borrower filed bankruptcy, it generally takes two years of rebuilding credit before a borrower will qualify for an FHA loan. Similarly, a borrower has to provide evidence of the past two years work history to be considered for a loan. Thus, if one experiences credit problems, a home loan is still a possibility but the borrower may have to wait a few years to qualify.
Another factor not as commonly considered is debt ratio. The debt ratio takes into account the amount of one's monthly payments in relation to the amount of one's income. In order to qualify for an FHA loan, one's total debt ratio must be under 43%. This means that the amount of the total monthly mortgage payment on a home loan plus all recurrent monthly expenses must equal less than 43% of one's income. This requirement protects the buyer from borrowing more than they can afford, anticipating unexpected home ownership costs and life events. Because credit card bills are considered recurrent, revolving debts, having credit cards with balances will affect one's debt ratio. A payday loan which is non-recurrent, paid off in full, in one fell-swoop.
A payday loan can potentially affect one's credit if a borrower defaults, but if treated as intended and paid off on time and in full it will not harm one's chances to obtain a home loan. Rather, one's overall credit score, payment history, occupational history, and debt ratio have far greater impacts on one's ability to secure an FHA loan. Thus, all house hunters should maintain healthy spending habits to keep their credit clean.
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