3 More Reasons Loans Get Denied
3 reasons loans get denied:
- Employment History
One factor lenders take seriously is your job security. They want to be sure you are going to be able to make your mortgage payments for years to come. If you’ve recently changed jobs, or are in the process of changing jobs, this can be a red flag for a loan officer.
Even if you are changing positions for the same employer, lenders can become skittish. If your new position doesn’t seem similar enough to your previous one, you can look like a riskier proposition; if your new job doesn’t work out, you could be out of work or demoted to a position where you might not be able to afford your loan.
If you were out of work previously or had a foreclosure, short sale, bankruptcy, etc., then you may qualify for a new loan under the Back to Work: Extenuating Circumstances program from the FHA. Our Back To Work Program counseling service can help you find out if you qualify.
While your credit score doesn’t factor in your income at all, lenders will look at this closely. Besides your employment history, which we have established should be as stable as possible, your income should be regular and sufficient to let you afford your loan payments.
Not all income will count; only “qualifying income” is included when calculating your debt-to-income ratio (DTI). If you get cash income that isn’t reported, or certain bonuses and commissions, they may not help you with a loan approval. Business expenses for which you aren’t reimbursed will be removed from your income when calculating your DTI. Self-employed people will have to work extra hard to get their income to count toward the application.
Any change in your income after you get pre-approval will derail the loan process. Any large, recent deposits or bank transfers will trigger questions from your underwriter. They will want to document when & where the money came from, and this will slow down the process. Don’t make random transfers or deposits; once the loan process begins, maintain the status quo! The only deposits your lender should see are your regular, predictable paychecks (preferably being direct-deposited into your bank accounts). Unusual transactions should be avoided during this part of the borrowing process. If you can’t properly document your income, you’ll be more likely to be rejected.
Like changing jobs or making deposits, it’s important not to take on any new debts after the loan process begins. The underwriter will go back and check your credit report prior to final approval, even if you’ve been pre-approved. You don’t want to leave any nasty surprises for them on your credit report. Going out and getting an auto loan while you’re trying to get approved for a mortgage will definitely get your application denied.
Some private debts that aren’t in your credit history may still come up in a public records search, so make sure you disclose them early on to avoid problems later in the loan process. Things like child support might not seem like debt per se, but they must be included in your application, since they are financial obligations you must meet, and will be factored into your DTI.
How to overcome these reasons for loan denial:
- Never change anything after your loan gets pre-approved. Don’t change jobs, don’t make large deposits, and don’t take on any new debt. Any big changes once the lending process starts will definitely make it harder to get approved.
- Make sure you document all your sources of income accurately and completely. Don’t let your mortgage underwriter or loan officer uncover any nasty surprises; being unable to properly document your income is a major reason for loan denial.
- Don’t leave out any of your debt obligations on your application, even debts that might not appear on your credit report. Lenders are thorough and they will find out about all of your debts—so you might as well own up to all of your obligations right up front.
Is there counseling that can help?
Our free, confidential credit and debt counseling can help you figure out exactly why your loan was denied and what you can do about it. We can also help you before you apply for a loan to make sure your application is complete and accurate, so you’ll have a better chance of getting approved.
Remember the process of applying for a loan isn’t about “tricking” your lender; you and your lender both want to be sure that the debt you’re applying for is one you can truly afford.
We’ve talked about six reasons for loan denial so far: Credit score, recent bankruptcy, debt-to-income ratios, employment history, income, and debts. Whatever the reasons for your loan denial, our certified counselors can help you create a plan to improve your finances and qualify for the loan you need.
Call us today at 800-294-3896. We’re here to help.