ere we look at the top reasons lenders reject mortgage applications. For each, we suggest ways to turn a rejected application into a winning one the next time around. Show 1. Inadequate incomeLenders want to know you can afford to pay your minimum monthly mortgage repayments and other debts without financial stress. In doing so, they will assess your income, expenses, commitments and prospective loan repayments to work out the amount of money left over after you’ve covered all your outgoings. A buffer is usually added into this calculation to cover an increase in repayments if interest rates rise. If you have little left from your income, your capacity to pay back a loan will come into question. What to do? 2. Credit file defaultsYour credit file is used by lenders to form a picture of your credit commitments and your ability to repay debt. It will count against you in the eyes of the lender if you have an insufficient credit history, or your credit report shows a history of late bill payments and defaults.
3. No proof of savings‘Genuine’ or ‘demonstrated’ savings shows that you have saved a certain amount over time towards your deposit. If money for your deposit comes instead from a work bonus or inheritance, lenders aren’t able to gauge your saving habits. Lenders usually want applicants to have a minimum of 5% in genuine savings as part of your deposit, particularly if you’re borrowing more than 90% of the property value. Talk to your Yellow Brick Road mortgage broker about ways to bypass the need for genuine savings. For some lenders, it’s enough to show you meet other criteria like stable employment and income, a decent deposit and proof of assets. Others will accept money gifted from parents, provided it sits in your account for the minimum wait time, and you meet the eligibility criteria. A Family Guarantee Loan is an alternative solution.
4. Insufficient depositEach lender sets their own limits on the maximum amount you’re allowed to borrow in relation to the value of the property you want to buy. Known as loan-to-value ratio (LVR), their decision will depend on variables like the loan amount, your credit history and the type of loan you’re applying for.Lenders want to see that you meet their LVR requirements. There will be a minimum deposit needed for the purchase of the property and documentation to prove your income and earnings. If your deposit is less than 20% of the purchase price and you don’t have evidence of genuine savings, it may be harder to get the type of loan you want. What to do? Talk to your mortgage broker about your options. We’re familiar with a wide range of loans and lending criteria, so we know how different lenders are likely to assess your repayment ability. Together we can get a clearer idea of how much deposit you need based on a realistic calculation of your borrowing capacity. In this article:If you've recently applied for a loan and your application was declined, it may feel like an insult. It's nothing personal, though, and there are several potential reasons for the denial. To improve your chances of getting approved the next time, it's important to understand why you were denied and how to make the right changes to increase your odds of getting approved. Two primary factors lead lenders to deny loan applications: problems with credit and problems with income. In some situations, however, other factors may also contribute to the decision. CreditYour credit history and credit scores are primary factors lenders consider when you submit a loan application. If lenders see any significant negative items on your credit report or other red flags, they may determine that as a borrower, you're too risky to approve at this time. Common negative items that can cause a denial include:
You can also be denied if your credit score is lower than the lender's minimum requirement. To prevent this from happening again, make sure you know your credit scores and shop around for loans that are targeted to your credit range. If you are not approved for a loan, you will receive what's called an adverse action letter from the lender explaining why. By law, you're entitled to a free copy of your credit report if a loan application is denied. The lender should provide instructions in your declination letter for requesting a free report from the credit reporting company the lender used to make its decision. If you don't receive these instructions, you can still request your report directly from the credit reporting agency listed on your declination letter. With Experian, for instance, the Report Access page offers instant access to your report through a secure, encrypted connection. IncomeIf your lender denies your loan application based on income, two issues are the likely culprits. The first is that your income doesn't meet the lender's minimum requirement. Unfortunately, most lenders don't publish this information, so it's hard to know if your income is high enough to garner loan approval. The other reason is that your debt-to-income ratio is too high. You can calculate this ratio by dividing your total monthly debt payments by your monthly gross income. For example, let's say you earn $5,000 per month and have the following monthly debt payments:
Your total monthly debt obligation is $2,000, giving you a debt-to-income ratio of 40%. If you applied for a mortgage loan, the maximum ratio to get a qualified mortgage is 43%, but many lenders prefer a ratio of 36% or lower. With other loan types, the maximum debt-to-income ratio varies by lender. But if yours is too high, it's a sign that the lender believes you may have a tough time keeping up with all your payments. To improve your chances of getting approved the next time you apply, work on paying down some of your debts. Other Reasons for DenialWhile your credit and income are the primary factors lenders consider, they don't tell the whole story. As such, you may be denied based on other reasons, such as your employment history, residence stability, and cash flow or liquidity problems. While you may not have a lot of immediate control over some of these issues, take the reasons seriously and wait until you're in a better position to apply again. When a lender or creditor asks a credit bureau to look at a consumer's credit report, an inquiry is posted to the consumer's credit report. A credit inquiry can be hard or soft. Almost every time you apply for credit, the lender will run a hard credit inquiry. For most people, a hard inquiry knocks less than five points off their credit score, but that little dip will not last long—24 months at the most. Approval decisions for loans are made by lenders, not any of the three nationwide credit reporting companies, Experian, Equifax, and TransUnion. Also, your credit report won't indicate whether a loan application was denied, so getting denied won't impact your credit score in any way. Whether you need money to finance a large purchase, cover living expenses or consolidate debt, it's possible to do so with bad credit. Specifically, some lenders specialize in working with borrowers with bad credit and have less stringent credit requirements. The catch is that your interest rate will generally be higher than what you'd qualify for with fair, good or excellent credit. Another way to borrow with bad credit is to get someone with good credit to apply with you as a cosigner. Some lenders allow cosigners to improve your chances of getting approved. Even if you can get approved on your own, enlisting a cosigner with a great credit history can help you score a lower interest rate. Keep in mind, though, that cosigners are equally responsible for paying off the debt. So if you default, it could damage both your and their credit history.
While it's possible to get approved for a loan with less than stellar credit, you may be better off waiting so you can get better interest rates and save money. For example, let's say you want to get a personal loan for $5,000. If you have fair credit, you might qualify for an interest rate of 25%, while someone with good credit might get an interest rate of 15%. Over three years, you'd pay $2,157 in interest, while they'd pay $1,240. If you can wait until you can improve your credit scores before applying for the loan, it could save you on monthly payments and interest charges over the life of the loan. To improve your credit, focus first on the reasons included in your declination letter. Take advantage of your free credit report and check to see if there's anything else you need to address. Regardless of the reason for your denial, focus on practicing good credit habits:
Improving your credit can take time. But if you do it right, you could save hundreds of dollars or more the next time you apply for a loan.
Want to instantly increase your credit score? Experian Boost® helps by giving you credit for the utility and mobile phone bills you're already paying. Until now, those payments did not positively impact your scores. This service is completely free and can boost your credit scores fast by using your own positive payment history. It can also help those with poor or limited credit situations. Other services such as credit repair may cost you up to thousands and only help remove inaccuracies from your credit report. |
What would you advise your client to do if their loan was declined due to their credit report?
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