Most people only apply for a loan when they have a great need for funds. These funds can be used for emergencies, a new car, and even home repairs. Whatever the reason a person needs a loan, it can be disappointing when they turn it down. Thanks to the Equal Credit Opportunity Act, lenders must disclose their reasons for denying a loan application. Below are three of the most common reasons.
Reason 1: Credit Reports
The first thing a lender will do when someone applies for a loan is get their credit report. Credit reports offer the lender much more information than just a number. If a person has a large amount of outstanding loans, this can make the lender a bit more cautious about increasing the person’s debt.
This credit report will also show the number of collection accounts, past due accounts, and the payment history of the person applying for the loan. These are all components of a credit report that can paint a picture for the lender, making them more inclined to lend you the money or decline a loan application.
Checking for discrepancies on a credit report can solve many problems for a potential borrower. If they discover that there are items on your credit report that are not theirs, they will need to call and correct it.
Reason 2: Insufficient means of payment
Lenders should know that the money they are lending will be paid back. When a borrower does not have sufficient income or means to repay the loan, the lender may be less inclined to grant him a loan.
In the enormous amount of paperwork required to apply for a loan, the loan company will ask the potential borrower to list their income and be ready to provide proof that they exist. Having this proof can help the lender justify borrowing the money if they are ever in doubt about why they approved the loan.
Reason 3: Too Much Debt
Lenders take a careful look at a potential borrower’s debt-to-income ratio before lending him more money. If a lender sees that a person is already using 50% or more of their earnings to pay off debts, a lender may consider them a high-risk borrower.
Loans are not the only thing that lenders will consider in terms of debt. The cost of living, credit cards, student loans, and collection accounts all influence the amount of debt a person has.
Hard money loans as an alternative
If a potential borrower wants to retry the loan application process, the first place to start is to correct the reasons for the denial. After verifying the validity of the information on your credit report, reducing your debt-to-income ratio, and adding collateral to a loan or proof that your income is sufficient to support the debt, they might try again. The most important thing for borrowers to remember is that the key is to double-check the accurate information. However, if the banks keep rejecting your application, another option for loans is to go through a private lender. Hard money lenders offer loans based on the net worth of real estate, so they are a good alternative when banks do not approve.
