Can You Use a Quick Loan While Applying for a Mortgage?

Can You Use a Quick Loan While Applying for a Mortgage?

Are you looking to get your foot on the property ladder? If so, you should ensure that your application does not get turned down because of your poor credit score and unaffordability. Applying for a mortgage is not a cinch.


The application process takes a lot of days to complete.


Here are the features of mortgages:


  1. Mortgages are secured loans. The property you are buying is itself secured against the loan.
  2. You will pay down the debt over an extended period of time. The repayment length of mortgages lasts for 15, 20 or 25 years, depending on the size of the mortgage.
  3. Mortgages require you to pay down a deposit. the down payment cannot be less than 10%.
  4. Bad credit applications are also accepted, but only by direct lenders, and they demand bigger deposits, starting from 20% of the market value of your property.

There are some people who believe that they should not be owing any other debt especially quick loans at the time of applying for a mortgage. They may or may not work against you.


What are quick loans?


Quick loans in Ireland are small payday loans aimed at people who have insufficient money to pay for their unexpected and unavoidable expenses, such as a car repair and a medical bill. Here is what you need to know about quick loans:


  1. Quick loans are known as instant loans, payday loans, small cash loans and emergency loans.
  2. Quick loans are short-term loans. Their repayment length is not more than 14 days.
  3. These loans are paid off in one fell swoop.
  4. They do not help with credit score building.
  5. They damage your credit rating when you fail to settle them on time.
  6. There is always a risk of falling into debt.
  7. They charge very high interest rates. The APRs of these loans can go up to 1500%.

What is the impact of quick loans on mortgage approval?


Before you understand the impact of quick loans on your mortgage application process, first, you need to comprehend what comprises the mortgage process. Here are the four factors that can make or break:


Your credit score


Your credit score is an acknowledgement of your previous payment behaviour. No mortgage lender would feel inclined to lend money without perusing your credit score. It should be decent. It ensures that you managed to keep up with payments in the past.


Bad credit ratings do not always result in rejection, but they attract high interest rates. Subprime borrowers are perceived as very risky, and lenders do so in order to mitigate risks. Your credit score speaks volumes about your credibility and affordability.


A debt-to-income ratio


A debt-to-income ratio suggests how much debt you owe against your income. A high debt-to-income ratio will call your credibility into question, as lenders will likely believe that mortgage payments will put a lot of strain on your pocket.


Lenders generally evaluate your monthly expenses against your monthly income in order to ensure you do not end up with little or insufficient money to pay for your essentials.


Employment stability


Another important factor they will look at is employment stability. You should have proof of income. A stable income source increases your chances of getting approval.


If you keep frequently switch between jobs, your profile strength will be weak, and as a result, your application will be straightaway turned down.


The size of the down payment


The size of the deposit also influences the lending decision. The greater the deposit, the better it is. If your credit score is good, the accepted down payment is 10%. However, you can increase its size.


It will reduce the loan-to-value, and as a result, interest rates will be more affordable. A larger down payment is expected when your credit report is not up to snuff.


Now that you know how mortgage process works. The following table illustrates how quick loans have a negative impact on your mortgage application.

FactorsEffects

Credit score

Applying for quick loans will result in hard inquiries. Too many credit inquiries will lower your credit score.

Debt-to-income

Quick loans will add a debt-to-income ratio, bringing your credibility and affordability into question.

Lender’s confidence

Lenders will likely assume that you often rely on short-term loans to pay for your expenses. It hints at poor budgeting.

Mortgage rates

Quick loans at the time of mortgage application will attract high interest rates or rejection.


Can quick loans be used to fund a mortgage deposit?


You need at least 10% of the market value of your house as a down payment. It is likely that you do not have sufficient cash to pay for them. If the down payment is not enough, you might think of employing quick loans to bridge the gap.


Sadly, this will not work to your advantage because of the following reasons:


  1. Quick loans are to be paid back along with interest. It will dramatically add pressure on your budget.
  2. They will increase the debt-to-income ratio. As a result, your lender will either reject your application or charge high interest rates.
  3. Your lender will perceive you as a risky borrower who could not even stow away money for the down payment.

Read: Top 10 Best Sources of Working Capital Every MSME


When are quick loans an ideal choice?


Here is when quick loans are an ideal choice:


  1. You are using these loans for small emergencies, and you are completely certain about your repayment capacity.
  2. You have paid off these loans before applying for a mortgage. If possible, these loans should be at least one-year-old before putting in a mortgage application.

To wrap up


Using a quick loan while applying for a mortgage will ruin your chances of qualifying for a mortgage at lower interest rates. You should never use these loans to fund a mortgage deposit either.


If you somehow owe these loans, make sure that you have paid them off in full before starting a mortgage application. It would be better if you took them out a year before submitting a mortgage application.