What To Do When You Are Turned Down For A Loan

by : Tabitha Naylor

Often, when your lender scrutinizes your loan application, and it is turned down for one reason or another, it is very distressing and discouraging. If this happens, you need to understand just why the decision was taken, and do what is necessary to remedy the situation. The causes for rejection listed below will help you understand why mortgage applications are declined.

Causes for rejection:

1. The appraised value is far too low: Your lender perhaps found the ratio of the loan amount to the sale price or the appraised value of the property to be substantially lower than the purchase price or loan-to-value (LTV) ratio. Or perhaps the LTV is higher than your lender is allowed to approve. Or, perhaps you have applied for 90-100% of the purchase price, as new the loan amount. A low appraisal will then make your loan request far too large.

If the seller's price of the property far outstrips the prevailing rates in your locality, you would be best advised to renegotiate the price with him so that it conforms to the prices in the area. It should also be one which your lender would not refuse in order to pass your loan request. If this can't be done, it might be a better idea to accept a smaller loan amount, and pay the balance from your personal funds.

2. Insufficient funds: When your lender goes through your financial information and your verification of deposits, he (or she) might find that you do not have enough funds to make the necessary down payment and cover closing costs. Even if these funds do not come from a loan, a gift could go a long way. Alternatively, you could ask the seller to take back a second mortgage on the property. This would help lower your down payment. Alternatively, you could get the seller to pay some of the closing costs. All these things could easily help your situation. Not to mention, each would help you buy more time, which would allow you to save more money.

3. Do you have insufficient income? Lenders will refuse your loan application if they find that the mortgage payment on your property exceeds approximately 28 percent of your monthly gross income. In addition, if your total debt, including mortgage payments and other installments reporting on credit, exceed 50 per cent, you stand to be refused. The figures are higher for FHA loans. But the situation can improve for you if your credit card record is good and you can prove that you already are carrying a huge household expense, including rent or mortgage payments. This is primarily the reason why it is highly recommended to be as accurate as possible when disclosing income and expenses on your initial application.

4. Up to your eyes in debt: Often, lenders don't reject applications solely because of the amount of debt someone carries. Most of the time, loan applications are rejected due to excessive amounts of credit cards and other revolving credit accounts, which show histories of rising account balances that come close to the limit prescribed. Such information is detrimental if you are out to prove your creditworthiness. To remedy the situation, you will need to pay off as many of your debts as possible and then reapply for a loan.

5. Poor credit history: What can be more devastating than to have your loan request turned down due to a history of poor debt repayment habits? If your lender sees that you have a history of making late payments often, owing outstanding amounts to the bank, or insolvency, he/she is hardly likely to pass a loan application for the purchase of property. Your lender is surely not going to be tolerant of a bad credit record. Even if you have had a low loan-to-value ratio on past accounts, and you have low debt ratios, you cannot wipe out a history of poor credit.

Rejection is not the end of the world: Just because a lender rejects your loan application doesn't mean you can never own property in your life. You can take corrective steps to improve your chances of acceptance. But, if you work diligently, you will iron out the wrinkles. The key is to find out why your loan application was rejected, and work towards correcting the issues.