Typical Reasons Loans Are Denied
Rejections don’t stop at the high school prom! As a business owner or manager, you may be unfortunate enough to experience the denial of a loan application. Why? Here are typical reasons given by the industry trade group for mortgage bankers.
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Rejections don’t stop at the high school prom! As a business owner or manager, you may be unfortunate enough to experience the denial of a loan application. Why? Here are typical reasons given by the industry trade group for mortgage bankers.
- Appraised value too low
One of the factors considered by the lender is the ratio of the loan amount to the sale price or the appraised value of the property, whichever is lower. If the appraisal on the property is substantially lower than the purchase price, the loan-to-value ratio (or LTV) may be higher than the lender will, or can legally, approve. If the purchase price is simply higher than the prevailing prices being paid in the general area, you can try to renegotiate the price with the seller down to a level more in line with the market and one that the lender would accept in order to approve your loan. If this is not possible, your only other solution is probably accepting a lower loan amount, assuming you have sufficient funds to cover the additional down payment.
- Inadequate funds
Based on the financial information and the verification of deposit, the lender may have determined that you do not have enough cash to make a down payment and cover closing costs. Usually, these funds may not come from borrowing, but a gift from a relative can be used as long as no repayment of the money is expected. Other solutions include getting the seller to take back a second mortgage, which would reduce the down payment requirement (assuming you can still qualify with the additional loan payments), or getting the seller to pay some of the closing costs, such as the origination fees. Finally, you could correct this problem by simply waiting, providing you institute a savings program in the meanwhile.
- Insufficient income
In assessing your ability to repay the requested loan, lenders look at the amount of your monthly income in relation to your proposed mortgage payments and to all of your monthly debt and installment loan payments. Generally speaking, your mortgage payment should not be more than 28 percent of your monthly gross income, and your total debt, including mortgage payments and other installment payments, should not be more than 36 percent. Sometimes, particularly if your credit card record is very good, if you can show that you are already carrying that much housing expense through rent or mortgage payments, you may be able to convince the lender to reconsider. This is an example of why full and accurate disclosure on the loan application works in your favor, even though it may not be obvious at the time.
- Too many debts
In some cases, it is not only the amount of debt owed by an applicant that prevents qualifying for the loan. Extensive use of numerous credit cards and revolving accounts with evidence of increasing account balances that close to the card issuers’ debt limits may be enough to kill the application. The primary solution to this problem is to pay off some of the accounts to bring down outstanding obligations, as well as the number of creditors.
- Unsatisfactory credit history
Nothing can be more damaging to your loan request than a history of poor debt repayment practices. If the credit report shows frequent late charges, past-due accounts, judgments, or bankruptcy, chances for approval of the loan are slim. Lenders may stretch their guidelines on debt ratios or income requirements, but they have little tolerance for a bad credit record. Even low loan-to-value ratios and debt ratios cannot offset an unsatisfactory credit history. If your loan is turned down because of a poor credit report, you may request a free copy of the report from the credit report company, which will be identified in a notice from the lender. Examine the credit report carefully to see if it is up to date and accurate. The credit bureau must correct any errors in the report. If there are unsettled disputes over certain accounts, it must also include your side of the argument in the report. Many lenders look for one year’s clean payment record to offset past credit problems. If the credit report is accurate and you have a questionable credit history, you need to start repaying outstanding balances on time in order to re-establish an acceptable record.
Source: Mortgage Bankers Association (www.mba.org)—For more information, contact the Mortgage Bankers Association, 1919 Pennsylvania Avenue NW, Washington, D.C. 20006; 202-557-2700.
