Why You Might Be Denied For A Loan
So you decided that you are finally ready to buy a home! That is one of the most exciting things to decide in your lifetime. You have taken your first step into actually purchasing a home. The next step is to get pre-qualified with a lender. Preferably a local lender where you want to live. Many people however are surprised when they discover that they are denied for a loan. Lenders and banks have strict criteria to lend money to people wanting to purchase a house. Today we will discuss four common hitches that keep people from being able to purchase a home. And hopefully this will give you an idea about how to overcome these obstacles and obtain a loan.
1.Bad Credit or No Credit
Having bad credit or no credit is without a doubt the most common reason that you could be denied for a loan. Having bad credit can stop you in your tracks and stop your home buying ambitions. Bad credit is something that can build up over the years. Maybe you got a little lax about paying your credit card statements on time. Or it’s possible that you spent a little more than you could afford. Everyone makes mistakes, however this sort of thing is what kills your credit score. Blemishes on the credit report can stay on for years and can follow you around like a bad cloud. It’s important to live within your means and pay your statements on time.
Many people, believe it or not, make the mistake of not building up enough of a credit history. Doing this is bad because if you have little to no history and want to buy a house there is no history to back up your spending habits. Having little or no credit is just as bad as having a bad credit report. You can avoid this by obtaining a credit card and paying it off monthly and responsibly. While getting a credit card can be scary, it is an important step to developing your credit history.
2. Not Enough Cash
Not having enough money for a down payment is another reason you might be denied for a loan. There are programs that allow you to purchase a home with a small down payment but you need to qualify for them with the right credit scores. A strong loan type, a conventional loan, sometimes requires you to put down as much as 20% of the down payment on your own. If you are serious about wanting to purchase a home, it is important that you start saving your money. There is much more to buying a home than just the down payment. There are also closing costs, inspection fees and appraisals that the buyer is responsible for and not having the money to do that will lead to problems in escrow. It might be best to put off buying a home for 6 months to make sure you save up enough money to start the home buying process, that way you can get the home you want!
3. High Debt To Income Ratio
This is a tricky one, and another reason you might be denied for a loan. It becomes easy for banks and lenders to prove that you can’t afford a mortgage if your debt to income ratio is too high. This means that you have too much debt and your income doesn’t cover those bills on top of a mortgage. This includes your monthly commitments. Think about car payments, student loans and credit card debt. You take the total of that number and divide it by your gross monthly income. This will leave you with the same ratio that your lender will be reviewing. Most people start running into trouble if your debt to income ratio is greater than 35% before applying for a loan. The bank worries about this ratio because they don’t want you to default on your loan. The easiest way to improve your ratio is by paying off old debts. Also, a good idea is avoid making any major purchases that require financing. It’s best to do that until after you purchase a home
4. Employment Problems
Lenders and banks will thoroughly investigate your employment situation. This goes just beyond checking whether you are working consistently or not. If you have had a job change or you were recently laid off your lender may not see you as a stable candidate for a home loan. Very often lenders will require two years of consistent employment with the same company in order to qualify you for a loan. Many people that are self-employed have trouble securing mortgages. That is because it can sometimes be difficult to prove that you make enough to support a home loan. If you own a small business or are an independent contractor it is important to have a strong paper trail showing income sources. Don’t be surprised if you have to undergo a lot of scrutiny from lenders.
While all of these obstacles can be tough to accept, especially if you are already worried about the home buying process in general. Just remember none of these obstacles are enough to keep you from getting a home. It’s just a simple process of changing your habits and waiting a few months. You will be ready to apply again if you are denied now. That may be tough but it is definitely worth it in the end. Then you get to go on to the next step and purchase your dream home!