Why would a bank deny a home loan?

Posted by Equity Realty on Tuesday, July 16th, 2013 at 3:07pm.

The standards for applying for home loans in banks have drastically changed over the past years. Practices and approvals for banks in giving home loans have changed a lot from what it used to be. The reason behind these drastic changes is that many banks were bankrupt or were put in a situation where they need several years in order to recover from a loss due to their carelessness with their home loan approvals and their loan underwriting methods.

The promotions such as No Doc Loans and 100% financing were the major factors that caused several banks to face financial crisis today. Today, banks see to it that they do not do the same mistake resulting in much thorough and strict application requirements and processing when applying for home loans.

Difficulties In Acquiring Home Loans To Finance Real Estate Purchase

Banks have tightened their lending standards that made it difficult for individuals to be approved in their home loan applications. This results to poor real estate sale because the number of people unable to get the necessary amount to finance a real estate purchase increased. In recent surveys, 75% of the banks indicated that they have increased their lending standards. With the increase in the standards of banks, more and more home loan applicants are being turned down by banks every day at a very alarming rate.

Therefore, it is important for an individual to understand the factors and guidelines in which banks based their decisions for denying their home loans.

Top Factors Why Banks Deny Home Loans

  1. Lack of income – The home loan applicant does not have enough evidence of a stable income for the last 2 to 5 years. No matter how much equity they have in their property or how excellent their credit score is, if they cannot come up with a solid proof of income then the approval of their home loan is going to be tough. This is one of the biggest obstacles in the loan process especially for borrowers who are already retired.
  2. Poor Credit –If the borrower has a poor credit rating, then he will have a hard time when applying for a home loan even if the borrower has very good equity in their house and a heavy down payment.
  3. Insufficient Liquidity –Banks will not risk funding a loan if the borrower has a strong excess liquidity and does not have a heavy down payment.
  4. Debt –Borrowers exceeding the banks guidelines for debt-to-income ratio and still have excessive debts will mostly result in the denial of their home loan application.
  5. Self-employment–Today, banks are stricter when it comes to lending to self-employed individuals thus making their application hard to be approved.
  6. Unemployment –Home loan approval can only be issued for individuals who are employed in a stable work for more than two years.
  7. Lying on the application –Banks are very strict today when it comes to the details of the loan applications. They have come across false details in the past, which ends in an unwanted result for most banks. Automatic denial is usually given for those applicants found with false details on their home loan applications.
Although some homeowners and real estate investors are greatly affected by these new standards, these new structures for home lending in banks point toward a better banking economy and overall condition of the economy.

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