If you and your spouse are just starting out, you may be thinking about owning a home or buying a new car. Approaching a lender and completing the necessary paperwork can be time-consuming. You also may be required to submit pay stubs, tax records and other documents. Waiting for a decision can take time, and finding out your loan application has been declined can be disappointing. Understanding why you were denied a loan can help you gain approval next time.
Your credit report tells a lender if you have been a responsible borrower. Not enough credit history or borrowing to the max on all of your accounts can cause your loan application to be denied, even if you pay your bills on time. Your credit score, which is a reflection of the type of borrower you are, is an important factor of your loan application. According to Experian, one of the major credit bureaus, a score of 700 or above is considered a good score but it doesn't always guarantee approval or the lowest interest rate. Before you apply for a loan, order your free annual credit report from the major bureaus at AnnualCreditReport.com and pay the fee to see your score.
When you buy a house for a particular price, it doesn't always mean the property is worth what you're paying. The assessment of the home's market value is performed by an appraiser hired by the lender to protect the financial institution's best interest. The appraisal must show the property is valued at the purchase price or above for the loan to be approved, if you meet all other requirements. When the economic climate is in decline, home values can fall compared with others recently sold in the neighborhood. If your appraisal comes in below the contract price, ask the seller to renegotiate to meet the guidelines of the bank.
To be approved for a loan, you must prove you have a source of regular income. If you own a business, you will need profit and loss statements and tax returns for the last two or three years, or other time frame required by the lender. If you have a job, you must submit pay stubs and W-2 year-end statements from your employer. The lender also may call your company to confirm the length of time you've worked there. If you were hired recently or you don't earn enough money to pay for your new loan in addition to your current debts, you can be declined.
Most lenders, regardless of the type of loan, will ask for proof of the balances in your bank and investment accounts, especially if you're applying for a real-estate loan. To be approved for a mortgage, you may need enough money for a down payment, additional transaction charges and remaining funds to cover your payment for several months, depending on the lender. If you can't come up with the cash required or you have to borrow it from someone else, your loan application can be denied. When looking at homes for sale, stay within your price range to make sure you won't need more than the money you've saved.
Carol Deeb has been an editor and writer since 1988. Her work has appeared in magazines, newspapers and online publications, as well as a book on education. Deeb is a real-estate investor and business owner with professional experience in human resources. She holds a Bachelor of Arts in English from San Diego State University.