Loan Request Rejection: Most Common Reasons

The most common causes of mortgage loan request rejections are: not having the proper loan documents for your application; attempting to borrow more than you can afford; having problems with the property securing the loan; being self-employed, particularly when approaching a business lender; or having bad credit. These issues can lead to loan denial for almost any kind of borrowing. However, you can take steps to reduce the impact of each.

Poor Loan Documentation

You must have certain documents to justify the amount you are trying to borrow, and your presentation of these documents can build lender confidence.

You must have at least two years worth of IRS form W-2s to document your income. You need recent bank statements to document that your down payment dollars were in your account and not recently borrowed. All current loans have paperwork you need to bring. Lenders will want to know of any other obligations or impending changes to your financial circumstances.

By having the required documentation - and your lender will have a list of it - in good order and professional in appearance, you overcome one of the most common reasons for loan request rejection.

Loan Amount

The documentation you provide helps lenders know your debt-to-income ratio. When considering you for a loan, lenders want to know how much of your income is available to repay your loan. As a rule of thumb, lenders want to see no more than 36 percent of your gross income going to debt. For housing, they want to see no more than 28 percent of your gross pay going to mortgage debt.

While these ratios can be adjusted depending on your other assets, if the loan amount you’re applying for puts you out of balance, loan request rejection is likely.

Property Conditions

Lenders not only want to know what you can reasonably afford to pay, they also want to ensure the amount you are borrowing is justified by the asset that will be purchased. This loan-to-value ratio varies but 80 percent is typical. This means if you want to buy a  $200,000 house, lenders would like you to put $40,000 and lend you the remaining $160,000. This is extremely negotiable. But problems can arise if the appraisal of the home comes back substantially higher or if the price of the house is too high for market conditions.

Bad Credit

All borrowers have their borrowing documented by the three main credit reporting bureaus: Experian, Equifax and TransUnion. This credit history contains a record of all your loans plus any negative activity such as late payments. This credit history is part of the calculation of your credit score, a number between 300 and 800, generated by the Fair Isaac Corp.

The median U.S. FICO score is 720. If you score 760, it’s excellent. A score of 620 or below means you have bad credit and will get higher, subprime interest rates.

Bad credit is a major reason for loan request rejection.

Self-Employment

Finally, it is more difficult for the self-employed borrower to get a loan. Incomes is harder to verify and tends to fluctuate. To avoid loan request rejection for the self-employed, other aspects of your application - your assets, your collateral, your credit score - need to be strong.