Home loan turned down? Here are some tips.

There are several reasons for why your application for a home loan might fail

In years past, qualifying for a home loan was somewhat difficult. Borrowers needed a down payment of at least 20% of the purchase price, and lenders were generally local banks or savings and loans. Many people saved money for years to be able to afford the down payment on a home. Times have changed, banks have merged into large, national corporations, and lenders have introduced more than one hundred different types of loans so that most anyone can qualify to buy a house.

Despite the new friendliness in the lending industry and the ability to help most anyone qualify, sometimes would-be buyers find that their loan application has been denied. This isn’t necessarily the end of the world, but being denied a home loan is still disappointing. What sorts of reasons would a lender have for denying a home loan? What can be done about it?

• Reason #1: Insufficient income - Loan amounts are determined by the income of the borrower. The mortgage industry has guidelines regarding what percentage of a borrower’s income may be consumed by a house payment. That figure has traditionally been about 28%. If your income is such that your house payment would exceed that percentage of your income, your loan may be denied. Your solution to that problem would be to find a less expensive home, save money for a larger down payment, or find a higher paying job.
• Reason #2: Too much debt - Lenders like to see a particular figure, known as a debt-to-income ratio, in a healthy range. Ideally, lenders like to see a debt-to-income ratio in the 10% range, and total debt, including the mortgage and other debts, not exceeding 36% of a borrower’s gross income. If your debts are higher than 10%, and particularly if they run in the 20% range or higher, you may be turned down for a loan. Lenders want to make sure that they money they lend can be repaid. If a borrower has to spend too much of his or her income repaying other debt, the repayment of the mortgage may be in jeopardy. The solution for this problem is to reduce some debts before reapplying for a home loan.
• Reason #3: Poor overall credit - The first thing any lender does when reviewing a loan application is examine the credit report of the borrower. The credit report, maintained by companies Experian, Trans Union and Equifax, is a document that contains records of nearly all financial transactions. Home loans, auto loans, bankruptcies, credit card accounts and even such seemingly petty items such as parking tickets can end up on your credit report. Equally important is your FICO credit score, a three-digit figure that represents your credit worthiness on a scale from 300 to 850. The higher, the better. Lower scores, particularly those below 600, indicate a history of defaulting on loans or bankruptcy. Neither of these reflects well upon someone who is applying for a home loan. Your best bet in the case of poor credit is to take your time, repay some bills, and reestablish a reputation as someone who can be trusted with credit. This may take a year or two, but it’s well worth the effort. Not only will your credit score improve, but your higher score will qualify you for better interest rates on loans in the future, rather than the high-interest subprime loans offered to those with bad credit.

Don’t despair if you’ve been turned down for a loan. All of these problems can be fixed with time and patience.