While it’s no secret that your credit can play an important role in determining whether or not you qualify for a home loan, the truth is that it’s actually not the only factor. For many people this can come as a surprise, especially if they were relying on getting a specific loan. In order to help avoid a similar situation for yourself, here’s a quick look at some of the main reasons why a bank might still deny you a loan, even if your credit score falls within the acceptable range.
1. You Asked for Too Much
Even if you have a great credit score, it won’t amount to much if you’re simply asking for too much money from the bank. If your income isn’t high enough to match the scope of the loan you’re seeking, then the bank won’t feel confident in lending out the money to you. The bank isn’t doing this to be cruel though, it’s because they need to make sure that you can reliably afford to pay off your mortgage loan. If your income is too low, then it follows that your chances of paying off the amount each month will be dramatically lower than someone else.
If you’re wondering just how much is too much, there’s actually a relatively simple formula that can be used to determine your target income or mortgage amount. First, take your gross monthly income, which is your yearly income divided by 12, and then divide your mortgage loan payments by that amount. The percentage you get from this formula is referred to as your housing expense ratio, and is what the bank uses to make decisions on your loan request. If your housing expense ratio is below 28%, then you are far more likely to be approved.
With all of that in mind, it’s worth pouring over your finances one more time before you release them to the bank. Are you forgetting about any additional sources of income? If there’s anything that you can draw extra cash from, be sure to include information on it so that the bank can make a fully accurate decision.
2. You’ve Already Taken on Too Much Debt
Sometimes a good credit score and a solid income base aren’t enough, especially if you’ve already taken on too much debt in the past. When the bank makes a consideration on a loan, they’ll want to see your debt to income ratio, which is a measure of how much money you’re paying out on debts each month compared to the income you’re bringing in. In order to determine this number, take all of your existing loans and divide that value by your previously determined gross monthly income. In terms of an acceptable debt to income ratio, banks typically want to approve borrowers with a DTI of less than 36%.
If you’re concerned about your existing debt to income ratio, then you should focus your efforts on trying to pay off your smallest obligations first, so that you can steadily close the gap and make yourself look like less of a risk to banks. Although some debt is good for building up your credit, having too much is simply not worth all of the hassle it brings.
3. Your Income Is Too Risky
If you’re someone who relies on self-employment for their income, or an otherwise irregular means of employment, then banks will have a harder time accepting your application. When the bank approves a loan, they want to know that it will be paid off in a reliable fashion, and that means not taking a risk on someone who might not always be able to maintain their level of wealth. Even if you’re someone who is meticulous in paying off bills and ensuring that you have a low debt to income ratio, banks will have a hard time trusting you.
Of course, there are a few ways that you can make the application process easier on yourself. First, make sure that you have thorough records of your employment and tax history, so that you can present a solid case for your financial worth and reliability. Second, and perhaps more importantly, be sure to offer a sizable down payment on the mortgage, so as to make yourself look like less of a risk.
Dealing With Rejection
If you find yourself in a situation where you’ve been denied a loan, try not to let it get you down. As you’ve seen throughout this guide, there are plenty of steps you can take to make the process less of a hassle the next time you go through it. All it takes is a little perseverance and you’ll eventually find yourself with the means to get the home of your dreams, regardless of your credit history.