When you initially apply for a home loan, your lender’s representative will pre-qualify or pre-approve you for a home loan. With a pre-approval letter in hand, you may understandably feel confident that you can move forward with your home buying plans without issue. However, many people unfortunately have their home loan rejected after pre approval. When you have a home loan rejected, you may lose deposits for a financial loss and experience considerable stress and anxiety. In some cases, you may even have to rush around to find a new place to move to. By understanding reasons for personal loan rejection, you can take precautionary steps to prevent this from happening to you. These are some of the common reasons why a home loan is rejected.
To get pre-approved for a home loan, you typically only need to provide a completed loan application and authorization for the lender to review your credit report. However, a significant amount of supporting documentation may be required after the pre-approval is issued. Generally, this information is needed to corroborate the information that you stated on your loan application. For example, tax returns and pay stubs may be required to verify your income level and history. Bank statements may be required to prove that you have enough money to close on your loan. In many cases, lenders will review these supporting documents and discover that they need additional documentation. Essentially, they are analyzing all aspects of your finances with a fine-tooth comb. If you are unable to provide the documentation they need to complete a thorough analysis, your home loan request may be rejected.
You Do Not Have Enough Funds to Close on Your Loan
There are many ways that you can save for your down payment and closing costs, such as through the First Home Saver program, your savings account and more. When you believe that you have amassed sufficient funds for your loan to close, you may be ready to move forward with your plans to purchase the home. However, many people fail to estimate loan repayment closing costs properly. They also fail to take into account that most lenders want you to have at least a few months’ worth of mortgage payments in your savings account after closing. There are also loan costs, such as the appraisal and property inspection, which are due upfront. As a good rule of thumb, you need your down payment amount plus three to six percent of the sales price for closing costs plus three to six months of mortgage payments available in your accounts.
You Recently Made a Large Purchase With Cash
When you look at reasons for personal loan rejection, recent large purchases rank high on the list. Many people will unfortunately purchase a car, a boat or another large, expensive item during the home loan process. They may think that they have enough funds to close and that they can comfortably use some of their cash reserves to make this purchase. They may also think that because the item is being purchased with cash, it will not impact their credit rating. However, when you use your cash, even cash reserves that are not needed for the down payment, you can alter how the lender analyzes your loan request.
You Took on New Debts
While some people will make purchases with cash, others will take on new debts. This may be something as simple as purchasing a few furnishings for your new home before you move in, or it may be something as significant as applying for a new car loan. All debts, such as credit card payments, car loan payments, investment loan repayments and more, are carefully reviewed by the underwriter. The underwriter will analyze your debt level in comparison to your income level. When you take on a new debt, you will throw this analysis off kilter. It is important to avoid making any large purchases with cash or credit until after your loan closes.
Your Income Cannot Be Verified
Your home loan pre-approval was issued based in large part on the income that you stated. Some people will estimate their amount on the high end to make their loan application look good, but this can unfortunately backfire on you when the underwriter looks for documentation to support the inflated income figure. Other people are self-employed, and they may take cash payments from customers or write off numerous expenses. They may also not realize that the underwriter will take an average of their income over the last few years rather than the current year’s income in some situations. When you are filling out the loan application, it is important that you ensure that your income can be fully verified. It may also be wise to ask the lender’s representative how the income will be verified so that you can provide the right figures. For example, your average income over the last two years may be much lower than your current income based on pay stubs.
Getting pre-approved for a home loan can be a monumental milestone, but keep in mind that the loan still needs final approval. Take time to talk to your lender about what it takes to reach the final approval stage, and be prepared to provider your lender with all required information in a timely manner. By doing so, you can increase your chance of getting final approval on your home loan.