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Can overdraft prevent me from getting a mortgage?

The global economic slowdown that followed the credit crunch in the late 2000s led banks, building societies and other financial institutions to significantly tighten their lending criteria.

Any concerns about an applicant's ability to pay a mortgage can lead to a home loan being refused. Whether an overdraft is seen as being problematic depends on whether the facility has been agreed in advance and how it is being used.

Authorised vs unauthorised

Dipping into an agreed overdraft facility occasionally will be highly unlikely to scupper a mortgage application by itself.

If you miscalculate your income or spend more than you have coming in, you may find yourself with an unauthorised overdraft. This can not only result in fees and penalties that may increase your overdraft, but may also create a negative view of your ability to manage your finances.

Bank statements

Before granting any mortgage, lenders require applicants to submit copies of their recent bank statements. If your records show a large overdraft that is always close to its limit and never gets smaller, or a regular pattern of going overdrawn without authorisation, a lender may question whether you'll be able to meet the regular monthly payments required to service a mortgage. A lender may also choose to treat your overdraft facility as an existing line of credit and reduce the amount you are able to borrow accordingly.

Credit score

If you exceed your authorised overdraft limit or slip into the red without prior agreement, any direct debits or standing orders that are due on your account at the time may not be paid. Some banks will honour such payments and charge interest and fees on your overdraft.

If declined payments form part of a credit contract -- mobile phone bills, credit card payments or a car insurance instalment plan -- they are likely to be reported to credit reference agencies. A regular pattern of late or missed payments may lower your credit score and could result in your mortgage application being declined.

Strategies for success

Prior to making a mortgage application, pay off any overdraft in full and ensure all direct debits and other regular payments from your account are made on time. Wait until you have at least three months of "healthy" activity built up in your bank account before sending in your application so that potential lenders will see your finances in the best possible light.