Common Reasons Why a Mortgage Loan is Denied

Loan application rejection is just as common as approvals. You may end up in a difficult position if you had decided to use your property as a mortgage for a loan, only to be turned down by the lender. Since mortgage loans come with a low mortgage loan interest rate, denied mortgage loans can impact your financial future and disrupt your years of planning. However, knowing the common reasons for mortgage loan rejection can help you in reworking your plan to meet the expectations of the lending institution. 

Denied Mortgage Loan? Here are the 7 common reasons for mortgage loan denial.

Small down payment: 

What proportion of the total amount are you putting in as a down payment? Lenders consider this factor when approving mortgage loan applications. A higher down payment convinces lenders that you are a low-risk borrower. As such, the larger the down payment, the lower the probability of mortgage loan denied in underwriting.

A recent change in employment: 

Have you recently switched your business? Or have you moved to a new job? Whatever the situation may be, lending institutions disapprove of such circumstances. Every lending institution expects you to have a steady job and a consistent stream of income. Even if you have a pre-approved loan due to the previous employment status, a change in occupation results in a denied mortgage loan after pre-approval. 

Also Read: Documentation for Loan Against Property - What You Need to Know

High debt to income ratio: 

Assume you have a monthly income of Rs 1 lakh, of which Rs 80,000 is used to pay your existing loan EMI. In this instance, what would you expect from a lender? Do you think your mortgage loan against property will be approved? To determine your loan repayment capability, financial institutions take this factor into account. A debt-to-income ratio of less than 50% is considered good. Anything above that could result in a mortgage loan denied last minute. 

Low credit score: 

This is one of the most common mortgage loan rejection reasons. Poor credit history reveals skipped or defaulted on mortgage loan instalment payments. If you have defaulted on your previous debt obligations or have delayed current loan EMI payment, your credit history will be impacted. So next time when the lender denies mortgage loan, check the flaws in your credit history instead of arguing with the financial institution's executive. 

  Also Read: Home Loan vs Loan Against Property: What should you choose

No credit history: 

Are you a first-time borrower who has been denied a mortgage loan against property by the lender? Have you tried to find out the mortgage loan denial reasons in this case? If not, you should be aware that when approving a mortgage loan against property, lenders look at your credit history. Due to the risk involved and high loan amount, a lack of credit history will result in a denied mortgage loan. However, in case of approval, you might have to pay a high mortgage loan interest rate. 

Tax return errors: 

Have you filed your income tax returns accurately? If not, go and file a revised return. This is because the lender will cross-verify your income tax return with your employment and financial records. Any discrepancies in the same could result in a mortgage loan denial. Therefore, if you have filed your ITR incorrectly, file for a revised return and then apply for a mortgage loan. 

Business debt:

Being a business owner, you might be running on too many business debts. The scenario is not uncommon, yet it is disliked by financial institutions. Suppose you have a low debt-to-income ratio and still go empty-handed with a denied mortgage loan, business debt could be the reason. If you have sufficient liquidity in your business and earn a high income, but still want to avail of a mortgage loan, your reputation may be called into question.

Also Read: 9 Factors Which Impact Your Eligibility for Loan Against Property

To Conclude

Consider a mortgage loan denial a small hiccup and always remember to take into account the aforesaid factors to ensure that you are a step closer to obtaining a mortgage loan against property. You should review your mortgage loan rejection letter. This way, you will get the right information and knowledge about what needs to be done to fix the denied mortgage loan situation.