This guide outlines the three key factors that can lead to you having a loan denied.
For the vast majority of business owners — and also homebuyers — being approved for a loan means the difference between growing your business (or owning a home) and getting stuck where you are. So, it’s in your best interest to regard the loan application process with due importance. Additionally, many people wind up hindering their chances of loan approval without even realizing it. So, before submitting your first loan application, consider the following factors.
Things that may see a loan denied
Loads of Unpaid Debt
It makes sense that lenders take the existing debt of applicants into account when making decisions. If an applicant is mired in existing debt, it’s a reasonable assumption that staying current with loan payments might not be a priority for them. In addition, loads of unpaid debt often indicate a lack of maturity and financial responsibility to lenders and leads to you having a loan denied.
You can nip this problem in the bud by massively paying down your outstanding debt before applying for a loan, if not paying it off entirely. So, no matter how eager you are to expand your business or become a homeowner, placing this dream on hold for a bit will enable you to make major headway into your existing debt and increase your likelihood of loan approval.
Additionally, once your debts have been paid off, give your credit score a little bit of time to recover before proceeding to submit mortgage loan applications. When it comes to first time home buyer tips, few are more valuable than getting a handle on debt and reduce the chance of having a loan denied.
By extension, you should avoid putting large purchases on credit during the loan application process, as this is among the worst times to add to your existing debt. So, if you absolutely must make a large purchase during this time, use cash or secure a short-term loan from a trusted friend or family member.
Spotty Financial History
Unsurprisingly, many lenders are hesitant to approve applicants with spotty financial or employment histories. After all, without a consistent stream of income, keeping up with loan payments is liable to prove difficult.
In fairness, there are a number of perfectly understandable reasons for which people have spotty histories, many of which are due to factors completely out of their control. However, expecting a lender to take this into account is likely to result in disappointment and a loan denied.
So, when applying for a business loan, have at least two years solid financial history, and when applying for mortgage loan, it helps if you’ve been gainfully employed full-time for at least two years. This will illustrate that you’re able to consistently generate income, thereby helping your chances of approval.
For good measure, you should also avoid submitting mortgage applications right before or right after quitting a job, as this may indicate a lack of financial stability and lead to you having a loan denied.
Another thing you want to consider is multiple streams of income. If you have more than one business or job — or you have passive income streams —and you want to qualify for a loan you need to look into what you can qualify for.
A lot of federal loans, so first time loans, will require you to prove that you can work two jobs for a long period of time. This means if you just started two jobs and are trying to get approved with both incomes combined, you may not be able to until you can prove you have worked the two jobs for more than two years. So this means you will have to take your highest paying job and only use that income if you try to get approved before that two year mark.
Lack of Regular Income
Applying for a loan in the absence of regular income is unlikely to produce the results for which you’re hoping and you are likely to see your loan denied. There’s little wonder as to why regular income is such an important factor to many lenders. If an applicant doesn’t have money coming in on a regular basis, how likely are they to stay current with mortgage payments?
If you lack regular income but are confident in your ability to repay a loan, consider enlisting the aid of a dependable cosigner. Furthermore, if you have ample savings, it may be a good idea to make prospective lenders aware of this – provided, of course, you’re able to produce proof.
Of course, even if you have a regular source of income, your loan application is liable to be rejected if your income level is deemed insufficient. As many lenders are well-aware, having a job doesn’t necessarily equate to being able to afford a loan or mortgage. So, if your income level is deemed insufficient by multiple lenders, shifting your focus to more affordable homes may be the wisest course of action.
A sizable majority of us couldn’t afford a home without a manageable mortgage loan. That being the case, first-time homebuyers would be wise to approach the loan application process with due seriousness.
As many hopeful homebuyers have come to discover, sinking your chances of loan approval is all-too-easy. In fact, you may be dramatically diminishing your odds of approval without even being aware of it. In the interest of increasing these odds, be extremely mindful of the behaviors discussed above.
What to do if you have a loan denied
Getting rejected for a loan can feel like quite a blow to your self esteem. But there are lots of options for you so do not fret! You can get another job and try to save more money so that you look better to lenders.
You can take a year and work on your credit so that you get better financing options and save lots of money in the long run. You can also get a co borrower so that you can work on your credit and income and then refinance somewhere down the road to get the loan only in your name.
Conclusion
So there may be options yet, don’t give up on your house hunting dreams! Give some of these options a try or get creative, if there is a will for a home, there is way and sometimes it just takes time to get there. Happy house hunting!
