If you are interested in buying real estate but had your application for a home loan rejected, you have options. Plenty of them.
Of course you can ask the lending institution why they put the kibosh on your application but they wonât likely tell you the complete story because they are afraid youâll sue them. There are many factors that the bank considers when deciding whether or not to grant you the loan.
Some of these reasons may have nothing to do with you at all. The bank has its own guidelines and they’ll never share them with you as I said. But regardless, one of the most important considerations is your credit score. And as you’ll see, you can do plenty about that.
But let’s get back to business. Youâve received your loan rejections letter, now what do you do?
First, decide if you want to try to go forward with the purchase anyway. If so, this will require you to find financing alternatives. One good option is getting the seller to carry the mortgage. Even if you have bad credit you still might be able to achieve this. Thatâs because interest rates are so low right now, sellers might be very interested in getting more than 1% on their money. Of course this will probably work best if you provide a significant down payment on the purchase. But if the seller is very motivated, he or she might be willing to provide financing without a substantial down payment.
Another path is to work with âhard money lendersâ (firms that loan money to distressed buyers) charge enormously high fees and interest rates. If that is the only path available to you, Iâd suggest you follow the steps below and reapply later on. Donât ever take hard money loans if you can avoid it â’ even if it means you donât buy the property. Usurious rates are almost never worth paying.
Regardless of your decision to go ahead with the purchase or not, you should do everything possible to make yourself a more attractive borrower.
1. Check your credit score and report.
Are there any errors on your report? If so, you can correct credit report errors yourself in many cases. But the only way youâll know if there are errors is if you first get a hold of your report. Fortunately, you can do that easily. There are even ways to get your free credit score without using a credit card.
2. Start building a high credit score
You will need to improve your credit score. Make sure you donât carry a credit card balance every month. Pay off your consumer debt every month on time. If you need to consolidate your debt, consider doing so by using a peer-to-peer lending company like Lending Club. This is a great way to pay off high cost credit card debt and get a lower monthly payment and lower interest rate.
3. Fall in love with your job
One fear that banks have is when a borrower changes jobs often. It demonstrates instability and higher risk. Your best bet is to stick with your job for at least 3 years in order to garner maximum brownie points with lenders. Ohâ¦and keeping a job is also a great way to stay out of debt too. Nice side benefit. The younger you are, the more forgiving the banks are when it comes to job stability. Take this to mean that as you get older, lenders will look for more than 3 years. Conclusion? Donât take jobs you donât think youâll keep. This goes for folks without a college diploma. You can still find great jobs without a college degree.
4. Donât live with flakes
If someone in your house is a deadbeat, your address might be flagged and that might be at least partially responsible for your loan rejection. If someone who lives at your home didnât make a credit card payment or payment on another loan, thatâs probably been reported to one of the three credit bureaus and youâre going to get twisted for it.
Either ask the person who is casting a giant shadow on your loan app to move out or explain to the bank manager that this person is in no way financially associated with you â’ assuming thatâs true.
5. Round Peg – Square Hole
Each bank has its own lending policies as I said above. That means they decide what kind of loans they want to make to which kinds of people. For reasons theyâll never explain, you may not fit their profile. So if you get a loan rejected and canât understand why, go speak to the manager. Ask her if the decision would be positive if you are able to pony up more security. You could get someone to guarantee your loan or be a co-borrower. You could also offer collateral.
Bottom line? Try to find out as much as you can as to why your loan was rejected. Clean up any errors on your credit report, take steps outlined above to improve your credit score and go back and try again.
This is a guest post from Neal Frankle. He is A Certified Financial Planner in Los Angeles. He is also the owner ofÂ Wealth Pilgrim, a top-notch personal finance blog.