Three reasons why loan applications are denied

Most people only seek a loan when they are in dire need of funds. These funds can be used for emergencies, a new car, and even home repairs. Whatever the reason a person needs a loan, it can be disappointing when they turn it 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 reports

The first thing a lender will do when someone applies for a loan is check their credit report. Credit reports provide a lender with much more information than just a number. If a person has a large number of outstanding loans, this can make the lender a little more cautious about increasing the person’s debt.

This credit report will also show the number of collection accounts, 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 likely to lend you the money or deny a loan application.

Checking a credit report for discrepancies can solve many problems for a potential borrower. If they discover that there are items on your credit report that are not yours, they will need to call and rectify this.

Reason 2: Insufficient Means of Payment

Lenders need 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 repay the loan, a lender may be less inclined to give that borrower a loan.

In the large amount of paperwork required to apply for a loan, the loan company will ask the potential borrower to list their income and be ready to provide proof that income exists. Having this proof can help the lender justify lending the money if there are ever any questions as to why they were approved for the loan.

Reason 3: too much debt

Lenders carefully look at a potential borrower’s debt-to-income ratio before lending more money. If a lender sees that a person is already using 50% or more of their income to pay off debt, they may consider you a subprime borrower.

Loans aren’t the only thing lenders will consider in terms of debt. The cost of living, credit cards, student loans, and collection accounts all influence the amount of debt a person carries.

Hard money loans as an alternative

If a potential borrower wants to retry the loan application process, the first place to start is to correct the reasons for the denial. After checking the information on your credit report, lowering your debt-to-income ratio, and adding collateral to a loan or proof that your income is enough to support the debt, they might try again. The most important thing for borrowers to remember is that double checking accurate information is key. However, if the banks still reject your application, another option for loans is through a private hard money lender. Hard money lenders provide loans based on real estate equity, so they are a good alternative when banks won’t approve.