Three Reasons Loan Applications Get Denied

Most people only pursue a loan when they are in dire need of obtaining funds. These funds can be used for emergencies, a new car, and even repairs to the home. Whatever the reason a person needs a loan, it can be disappointing when they get turned down.

Thanks to The Equal Credit Opportunity Act, lenders are required to disclose their reasons for denying a loan application. Below are three of the most common reasons.

Reason 1: Credit Reporting

The first thing a lender will do when someone applies for a loan is to pull his or her credit report. Credit reports offer the lender a lot more information than just a number. If a person has a large number of loans already outstanding, this may make a lender a little warier about increasing the person's debt.

This credit report will also show the number of collection accounts, any past due accounts, and the payment history of the person applying for the loan. All of these are components of a credit report that can paint a picture for the lender, making them more inclined to lend you the money or deny a loan request.

Checking for discrepancies on a credit report may solve a lot of problems for a potential borrower. If they find that there are items on their credit report that are not theirs, they will need to call and get this rectified.

Reason 2: Insufficient Means for Payment

Lenders have to know that the money they are lending is going to be paid back. When a borrower does not have sufficient income or means to pay the loan back, a lender may be less inclined to give that borrower a loan.

In the massive amount of paperwork it takes to apply for a loan, the lending company will ask the potential borrower to list their income and be ready to supply proof that the income exists.

Having this proof can help the lender justify lending the money if there are ever any questions as to why they did approve the loan.

Reason 3: Too Much Debt

Lenders take a hard look at a potential borrower's debt-to-income ratio prior to lending them any more money. If a lender sees that a person is already using 50% or more of their earnings to pay on debts, a lender may consider them a high-risk borrower.

Loans are not the only thing that lenders will look at in terms of debt. The cost of living, credit cards, student loans, and collections accounts factor into the amount of debt a person has.

Hard Money Loans as an Alternative

If a potential borrower would like to try the loan application process again, correcting denial reasons is the first place to start. After checking the validity of the information on their credit report, reducing their debt-to-income ratio, and either adding collateral to a loan or proof that their income is sufficient enough to support the debt, they could try again.

The most important thing for borrowers to remember is that double-checking for accurate information is the key. However, if the banks are still rejecting your application, another option for loans is going through a private hard money-lender. Hard money lenders provide loans based on real estate equity so they are a good alternative when banks don't approve you. (EA)