Rejection is rarely welcome, especially when credit applications are involved. During the past few years, numerous applicants have been declined credit for secured loans and mortgages. The question many people are asking is why. Provided below is a summary of some of the reasons why applicants are being refused credit for loans and mortgages. People who have been turned down for mortgages should also read more here for a guide on how much they will realistically be able to afford.
As suggested above, rejection is usually as unwelcome as it is unpleasant. So far as credit applications are concerned, however, rejection ought not to be taken personally.
Rejection in the context of financial lending is simply a consequence of the applicant failing to meet all the criteria of the lender.
Credit scoring is used to assess the risk or creditworthiness of an applicant and it is usually this rating that causes applications to be rejected. In a nutshell, a poor credit score means a poor chance of being approved for credit.
The situation is slightly different in the context of secured lending. A secured loan uses the borrower’s property as security for the amount owed. The borrower risks losing their home if they default on repayments.
An unsecured loan does not attach itself directly to the property. However, a home may still be at risk if a homeowner defaults on repayments. Generally speaking, secured loans are approved more readily than unsecured loans.
There are several reasons why an application for a secured home loan is rejected, the most obvious of which is poor credit. Although an applicant may be able to offer their home as security, a poor credit rating could still ruin their chances of being accepted.
Unsecured loans can be rejected on the same basis. Equally, many mortgage applications are being turned down because the applicant cannot prove that they are creditworthy.
The solution is not to panic. If poor credit is ruining a person’s chances of securing a mortgage or loan, the situation cannot be remedied by applying to other lenders ad infinitum.
Multiple rejections in a relatively short period of time (i.e. six months) merely worsen the problem. Credit ratings take several months to recover from failed applications, so prospective homeowners ought to use this time wisely to rebuild their credit profiles.
Another reason why a mortgage application might be rejected is that banks are no longer keen to practice sub-prime lending. If an applicant’s credentials (e.g. income and employment history) do not meet strict criteria, the mortgage will not be granted.
It could be that a mortgage application is declined on the basis that the borrower does not meet the criteria set for a particular level of lending.
If a person is rejected for a 5 percent mortgage, for example, it is not necessarily the case that they will be denied a mortgage at 6 percent.
As noted above, lenders have become more circumspect of sub-prime borrowers, which is why the levels of risk most banks and mortgage providers are willing to accept are subject to stricter controls.
Finally, the extent to which an applicant can provide a deposit toward a property can greatly affect their chances of being approved for a mortgage.
Following the financial collapse of several years ago, 100 percent of mortgages are no longer favored by lenders, many of whom expect applicants to have saved a sizeable deposit.
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