3 Common Reasons Your Loan Application Was Denied

If your mortgage loan application was denied, you’ll find it a lot harder to invest in real estate. When you’ve done your homework, saved up for a down payment and you’re ready to take the plunge into your first investment property, it’s disheartening to discover the banks won’t lend you the money you need. Sometimes lenders will give you the exact reason why they declined you; other times the explanations may be ambiguous or unhelpful. If you want to improve your odds of getting approved the next time you apply, consider these three common reasons why loans are declined

1. Overall Poor Credit

Did you envision a board of directors sitting around a table in the bank’s back room going over loan applications by hand like in the movie “It’s a Wonderful Life”? Everything is in the hands of computers these days, including the future of your real estate investment career. There’s nothing personal about the process, and you won’t have an opportunity to make an impassioned plea about your real estate investment prospects. Most lenders use automated software to determine if your mortgage loan will be approved or not. The loan officer just inputs the pertinent information and the software spits out an answer. (Obviously, it’s not exactly like that, but close to it!) The point is, there may be many different reasons why your credit isn’t up to snuff.

One possible solution after being denied for poor credit reasons is to meet with a friendly loan officer and explain your situation. Tell them that you were denied previously and you want to take steps to make sure that it doesn’t happen to you again. You’ll find that many loan officers are very willing to sit down with you and review your credit profile from a lender’s standpoint. After all, they make a profit on lending money, not when you get declined for a loan!

2. Insufficient Income Documentation

We live in an age where certain people make money in ways that are not considered “above board.” While the term money laundering likely isn’t a topic at your dinner table, it is on the minds of underwriters and mortgage lenders. They want to make sure they lend to honest, tax-paying citizens who earned their money through legal means. If you don’t keep great income records, and if you have money coming in from unusual sources, you may have difficulty getting approved for a mortgage. Lenders need to verify your income so they can be sure you’ll have the money to make the payments; but they also legally need to ensure it comes from legitimate sources.

In the time leading up to your next mortgage loan application, keep meticulous records of all of your income. We live in a gig economy. As long as the sources are legitimate, it really doesn’t matter if you made money on the side as a graphic artist on Fiverr or if you’re a mega-successful day trader. What matters is that the income can be verified and that the sources can be traced back. How can you do this? Balance your bank statement each month (honestly, you should be doing this anyway), file your taxes in a timely manner, and—most importantly—get the tax IDs of everyone who pays you, especially if you’re getting 1099 income. Finally, don’t accept “off the books” pay and expect to claim this as part of your income.

3. It’s Not You, It’s the Property

Sometimes an issue with the property can cause you to be denied for a loan. In most cases, if the denial was property-related, it has to do with the appraisal. Maybe the appraisal came in too low, and the lender won’t lend on the seller’s asking price.

If this happened to you, it’s not the worst news in the world. Property appraisals are notoriously inaccurate sometimes. You may be able to work with that same lender and ask for a second appraisal. If that fails, consider shopping your loan around to different lenders. (By the way, multiple credit inquiries in a short period of time won’t hurt your loan approval outlook. Lenders understand that you may be shopping around.) If that fails, communicate your problem to the seller and ask if they can come down to meet the highest appraised value.

When your loan application is denied, it can feel like a personal judgement against your character. But don’t take it that way. These things are largely just automated decisions based on a complex algorithm. The main thing is, don’t give up trying. Don’t walk away from your dream of being a successful real estate investor based on one or more loan denials. Work with a loan officer, get your credit in good shape, keep meticulous records and don’t take no for an answer!