4 More Reasons Loans Get Denied
Reasons loans get denied:
- Down Payment, Collateral, Cash Reserves
Secured loans need collateral to be approved. If you get a secured loan against your car title, the lender will repossess your car if you don’t pay. With a home loan, the property itself can be foreclosed on if you can’t pay, but lenders take a risk of big losses if they have to auction off the house. If you make a large down payment, you make it less risky for the lender since they can make their money back even if they auction your home off at below-market prices.
Lenders also want to see that you have cash reserves left after you make your down payment. Taxes, moving expenses, home repairs…these things can take a bite out of your savings, and lenders know that. They want to be sure you have enough cash on hand to get through the first few months of homeownership and aren’t going to have trouble making your payments right away.
- Your Application
If your application has any mistakes or errors, the lender will see them and your loan application can be rejected on the spot. Lenders have a lot of applications to review, and one that is incomplete or riddled with errors is not going to be worth their time.
If anything is exaggerated on your application, like your income, this will create problems. You need to document every source of income you state on your application, as well as every debt obligation you have. Anything you leave out or exaggerate will come back to bite you during the underwriting process.
- Bad Timing
A recent bankruptcy, divorce, legal battle, or health issue can make it a bad time for you to be getting a home loan. Sometimes you have to wait until the circumstances are right.
With 2nd mortgages, lenders will have a waiting period if the home has been on the market recently. Don’t apply for a 2nd mortgage or refinance if you’ve recently listed your home for sale.
Sometimes, the loan is derailed through no fault of your own. If the seller of the property you are trying to buy can’t get clear title, or has some problem getting mortgage insurance coverage on the property, then you can be denied even if your application is perfect.
Finally, a bad or inexperienced mortgage professional can lead to a denied loan. Whether they missed legitimate early warning signs on your application that could have been corrected, or they make rookie mistakes, you may have just caught a case of bad luck when you applied for your loan.
- Subjective Rejection
Even after everything else is done and the application looks good, a mortgage officer can look over your application and downgrade it to a rejection based on subjective factors. If you’re self-employed, have been on the job for a short time, have a short credit history, or simply don’t have enough cash reserves in the bank, your underwriter can reject a loan application that was initially approved.
This is called “layered risk”. Even though the application is approved by a computer, a human can look at multiple negatives and decide it’s just too risky. Even if you have a down payment, you can get rejected if those funds were a gift, rather than money you earned. Lenders can also be uncomfortable if they see your new mortgage payment is going to be dramatically higher than the rent you are used to paying.
How to overcome these reasons for denial:
- Save up—build the biggest down payment you can, and set aside cash reserves to make sure you can truly afford home ownership.
- Pick the right property—if the property has problems, your lender will not be comfortable with the sale. Make sure the home you purchase is truly worth the selling price, and if there are problems on the seller’s end, be prepared to walk away and shop for another property.
- Do some advance work to make sure your timing is right. Pull your credit report early and make sure there are no surprises when you go in to apply for the loan (see our article, “Review Your Credit Report”). Gather all the documents you need ahead of time, including W2 and tax returns, pay stubs, bank statements, etc. Be ready to document all of your sources of income and all of your financial obligations.
- Fill out your application completely; don’t leave out any prior bankruptcies, foreclosures, or short sales. Report and losses you have—lenders will check your tax returns carefully, so make sure you document what they will see there on your loan application.
- Don’t necessarily borrow every penny you can—just because you have a certain capacity for debt doesn’t mean you have to borrow that much. Live within your means to make it easier for the lender to approve your loan (and for you to afford the payments after it gets approved).
Is there a counseling service available to help?
Free credit and debt counseling, pre-purchase housing counseling, and other services are at your disposal. There’s also counseling for the FHA Back to Work program that lets people with past credit problems qualify for a new loan. We’ve been helping the community get on the road to financial freedom for 40 years.
Whether your loan application was denied, or you are just starting the process of applying for a loan, call us today at 800-294-3896 for free, confidential help. We’ll help you figure out the best plan to get qualified for the loan you need.