Unable to Secure a Loan? Here are Possible Reasons for Repeated Rejections
Owning a house is a dream for everyone once they attain financial independence, but fulfilling that dream comes with challenges as currently, the housing prices in the United States are going up with no signs of slowing down. Even though mortgage rates are rising prospective buyers are willing to take high-interest loans to have their own homes. As they face rejections from lenders, check out the top reasons why loan applications might not be accepted.
Lower credit score
The credit score of the person applying for a loan is the key factor that decides whether a person is eligible for the loan or not, and the interest rate. It helps lenders check the credibility and previous credit history of the applicant. If you have missed any of your previous payments, or have overspent on your credit cards, that brings down your credit score can be the main reason for denial of your mortgage application.
Income falling short
The only way an individual can repay a loan is if they have a regular source of income. To evaluate the loan repayment capacity, lenders calculate debt to debt-to-income ratio, which explains what percentage of your income goes to the debts. A DTI lower than 43% is considered to be a healthy one by lenders. 36 or lower DTI makes a candidate most suitable for loans.
High loan-to-value ratio
No lender would grant a loan for the entire value of the house. Prospective house owners need to shelve out a certain sum of money from their savings to pay as a down payment for the house, and for the rest of the amount they apply for mortgage. If someone pays more money as a down payment, it means they will be taking the loan for less amount making the loan-to-value ratio low. An LTV of 80 percent or lower is considered to be a good one. If your LTV is higher, the chances of a loan application getting rejected are high.
Purchasing out-of-favor properties
Before processing the loan, an inspector from the lender generally visits the property to inspect if it has any sort of flow or structural integrity issues. If in the inspection the property doesn’t turn out to be sound, then there are high chances of the loan request getting rejected. Lenders don’t prefer to pass loans for condos and prefer stand-alone houses over them. If a property is under a lawsuit, that also doesn’t get approved for a mortgage.
Major changes in financial stability
The lenders look for your past financial records to check if you have had a stable or improving financial life over time. If there are any breaks in jobs or losses in business, or maybe you have changed jobs very recently, that could affect your mortgage application. They also go through bank statements to check the flow of the money. If you have recently received a large sum of money in your bank account, that means you could have taken it from friends and family for a downpayment. In such scenarios, it is advisable to submit a gift letter to the lender.
