You might be thinking, we work hard and make a good salary. We pay our bills on time, so we have a good credit score, so why are we being denied loans with good credit and income? There are several reasons this might be happening to you. Read on to find out why.
Why Are We Being Denied Loans with Good Credit and Income
The truth is lenders look at more than your credit score and income when you apply for a loan. This is especially true if you are trying to get a mortgage.
However, even when you are buying a new car or taking out a personal loan, chances are your bank or lender might be looking at other aspects of your financial situation, and they might not like what they see.
Here are the main reasons you might be turned down for a loan.
1. You Don’t Have a Long Enough Credit History
Even if your credit history is good, if it isn’t very long, you could be denied a loan.
Lenders want to see a longer credit report going back a couple of years or more to see how you handle your credit over a longer period of time.
If you just started having a credit score a short while ago, it will show that you have made your monthly payments on time, but it won’t show that you can handle that credit through good and bad times over a number of years.
If this is the case for you, the only thing you can do is to continue paying bills on time and wait it out.
2. You’ve Recently Changed Jobs
It’s not just how much money you make, it is also how long you have had your job.
So, if you have changed jobs recently, then credit card companies and lenders will worry about your job stability.
Yes, you’re making a good salary today, but will that continue a few months down the line?
That’s why when you fill out a loan application it not only asks where you are working but how long you have worked there.
Lenders want you to have been working at the same job for at least two years.
So, if you are planning on applying for a mortgage or another type of loan, be sure to do so before changing jobs.
3. A Large Cash Deposit
You wouldn’t think that making a large cash deposit could hurt your credit, but banks are weird about such things.
This is especially true if you are applying for a mortgage.
Your bank will be concerned that this deposit was a loan and that you will have to pay it back.
Most banks won’t let you use borrowed money for a down payment.
You will need to show where this money came from and if it was from a friend or family member you’ll need to be able to prove that it was a gift and not a loan.
4. You Have a High Debt-to-Income Ratio
Another aspect of your financial picture that lenders want to see is how much debt you have.
Even if you make all your monthly payments on time they may feel you have insufficient income to cover any additional debt.
This is called your debt-to-income ratio.
This is how it is calculated:
Let’s say you make $3,500 dollars per month before taxes.
Your monthly debt payments, including student loans, credit card payments, personal loans all combined equal $1,500 dollars per month.
That means your ratio is 42 percent.
($1,500 / $3,500 = 42.8%)
Your lender will want this ratio to be under 30 percent.
If yours is higher, you will need to work on paying off some of your credit card balances or other loans before you will be approved for a new one.
5. You Have a High Debt Utilization Ratio
There is another ratio your bank will look at when determining whether or not to approve you for a loan and that is your debt utilization ratio.
This number is determined by how much of your available credit you have used.
For example, let’s say you have two credit cards, and between the two of them, you have a total credit limit of $7,000 dollars.
You have charged $4,000 dollars total.
That means you have a debt utilization ratio of 57 percent.
A lender will frown on this.
They will want to see this debt utilization ratio of no more than 30 percent.
The bank’s concern is that you will not be able to meet all of your payments each month and might fall behind.
Again, if you have a lot of debt, spend some time paying it off.
Also, if you pay off a credit card, don’t cancel it. If you do, your total available credit will decrease and this will hurt your ratio as well.
You may also enjoy:
6. You Don’t Have a Big Enough Down Payment
If you are trying to get a mortgage, you will need a large down payment. Traditional banks want to see a 20 percent down payment.
That means if you are buying a $150,000 dollar house, you would need $30,000 dollars for your down payment.
If you are getting a government-backed loan such as an FHA loan, then you would still need between 3 and 9 percent which would be $4,500 and $13,500 dollars.
If you have less than these amounts, you would be required to purchase mortgage insurance and you may still not be approved for a mortgage.
7. You’ve Had Too Many Hard Inquiries
When you apply for a credit card or a loan it will create what is called a hard inquiry on your credit report.
Credit inquiries will lower your credit score.
The credit bureau will go back for a couple of years to see how many times you applied for credit.
They will start taking points off your score for each one.
Some people fill out credit applications so they can jump from one credit card offer to another. They do this because the credit card issuer may be giving points or low interest or miles.
All that sounds great, but it can hurt your chances of being approved for a loan.
You may also enjoy:
To Sum it All Up:
Even if you don’t have bad credit it can be difficult to get a loan if you have a lot of debt or have changed jobs recently. Make sure you pay off as much outstanding debt as you can before you apply and don’t change jobs until after you’ve been approved.