Top Reasons Why Banks Turn Down Loans

Navigating the lending practices of financial institutions can be arduous and confusing. Banks have stringent lending guidelines that aren’t always obvious to the consumers who rely on their products. So, when you get turned down, it can leave you scratching your head when you thought you had a solid application.

The following are the top reasons why banks decline loan applications and how you can work to resolve them— even for mortgage financing .

Poor Credit History

The first and most common reason banks turn people down is their poor credit history. While every lender is different, most are looking for a credit rating of 680 or higher. In some instances, they will approve you if your credit score is slightly lower; however, it is usually because of significant strength in another area.

Therefore, it is essential to clean up and improve your credit before applying for lending products, mortgages in particular. Aim for a score of 700 or greater to better your approval chances.

Inconsistent or Low Cash Flow

Poor cash flow is another reason for getting turned down by the bank. To determine your creditworthiness, lenders need to see consistent, reliable income from verifiable sources. It is an undeniable measuring stick that determines your ability to handle loan payments without defaulting and gives the financial institution greater peace of mind. 

Yet, even then, the lender can’t predict job loss or illness and must use a combination of other factors before making a decision. In addition, your total debt ratio (TDR) cannot surpass 30-32% of your gross annual income to get approved.

Lack of Security or Equity

When weighing risk factors, financial institutions look at your credit strengths, repayment ability, and how they can secure the loan with funds or assets. Without adequate security or a viable co-signer, they deem the loan too risky and deny the application.

For example, the property becomes collateral against the mortgage amount, but only up to a maximum of 80 to 85% of the home’s market value. The remainder must come from equity or your down payment.

Too Little Time in Business

For entrepreneurs, it can be even trickier to get financing, especially when it comes to mortgages. For one, mortgages involve long-term lending, often for 25-year amortization with large amounts.

It makes sense when you look at the success rate of new businesses. Unfortunately, around 90% of new businesses fail within their second to the fifth year. Banks know this and want to see well-established companies with steady growth before approving a loan application. As a result, they may request additional security or even a co-signer for collateral.

Concerns About Management Team

Believe it or not, another area of concern for lenders is an entrepreneur’s skill level and ability to operate their business—especially if they are new to an industry. Therefore, part of the loan application may entail a thorough business plan that documents daily operations, market forecasts, cash flow and sales projections, the owner’s resume and qualifications, the loan’s purpose, and detailed loan repayment schedules.

Should the financial officer feel the owner or the management team pose a risk of default, they are more likely to decline the loan. To avoid this, ensure you have your certifications, training documents, and a professionally written business plan to back up your claims as an entrepreneur.

Use a Trusted Mortgage Broker to Find Lending Solutions

Traditional lenders must operate within strict guidelines when processing loan applications. However, other financing options are available for people seeking more flexibility for their mortgage or lending needs. 

EasyMortgageLend.com provides borrowers convenient, friendly service from a broad menu of lending products when the bank says no. Their certified and professional staff know the intricacies of mortgage financing to provide the perfect solutions to hear yes!

Get your mortgage approved in minutes! Start your application online or by calling 647-895-3921 today!