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What Happens When You Have Less Than Ideal Credit Rating
In an ideal world, home buyers and real estate investors would walk through the front door of banks and swagger out with little problems getting the loan quantum they desire with the lender’s blessings.
At least that’s from the perspective of borrowers.
In the real world however, it’s never that straight forward.
And from the borrower’s perspective, it’s probably justified as they intuitively understand that a mortgage is not a privilege that everyone is entitled to.
If anyone and everyone would be able to obtain a high loan quantum as long as they request for it, it could also send real estate prices spiraling out of control very fast.
That’s not a good situation for the economy to be in for both home buyers and investors.
Moreover, tight credit evaluation processes banks use helps keep the pool of competing investors in check. That’s not a bad situation from the point of view of investors.
So what happens when a borrower has been judged by a lender to have a less than ideal credit rating?
1) Higher down payments
One of the best ways to alleviate the anxiety of lenders is to put down a higher down payment on the property.
The gist of loan rejections is ultimately down to a lender not being comfortable enough about a loan applicant’s financial status and history.
The fear without doubt is loan default.
Many factors might play into this determination from their credit department.
Putting in a more significant down payment on a house compared to the average individual shows that you are very serious of buying and keeping the property. Making defaulting on the mortgage a less probable event.
And when you pump in more capital, it basically means a lower loan quantum that the lender has to offer.
This lower loan amount would mean lower risks to the bank as well.
2) Higher charges and loan fees
There are various categories of risks that a lender would assess. They can be both qualitative and quantitative.
One of which is how much money they would lose or make in the event that the borrower defaults.
Taking into account foreclosure and clawing back funds from a sale, a lender don’t necessarily make a loss when defaults happen.
However, for the risks they are taking on a risky borrower, they might want to get as much revenue back as soon as possible. And not just from interest charges too.
This is when the prospect of more charges and higher fees will be presented to you in order to grant loan approval.
3) Higher interest rates
Related to more administrative or processing fees as mentioned previously, another method for lenders to minimize their risks is to charge higher interest rates.
Look at it this way.
If a lender manages to get as much money back as quick as possible, it will buffer the negative financial impact they would suffer should the borrower default in future.
However, don’t forget that once you obtain your mortgage, there is always the option of exploring refinancing opportunities.
You will have to work out your numbers to make a decision to refinance or not when the chance arises.
4) Request for more documentation
Whenever there is a borderline case for approval or rejection, credit analysts usually err on the side of caution.
They are not just trained to do so, but may be expected to do so too.
In the event of questionable validity of personal income for example, more paperwork might be required and requested in order for a credit analyst to verify the numbers.
Even with the streamlined processes lenders use to conduct credit assessment, there are still ways for people with bad intentions to trick or fake their way to mortgage approvals.
So if you have nothing to hide, graciously oblige with requests for additional documentation.
Believe it or not, bankers who make these requests are trying to help you obtain the mortgage you desire. They would throw your application into the trash otherwise.
5) More professional fees
Sometimes your income and debt ratio fits into the criteria for borrower the requested amount. Yet the lender is just not comfortable enough.
And your credit does not exactly build confidence in the beholder.
In this case, you might be requested to provide more credible information in order to aid your case.
For example, you might be requested to hire appraisers pre-approved on an internal panel of the lender to conduct an appraisal to determine the value of the property.
They might even request that certified home inspectors investigate the property thoroughly to ascertain the condition.
This will all cause your closing costs to stack up.
All in all, loan rejection is not always a sign that a lender is refusing to do business with you.
Most of the time, it is a lender’s way of communicating to the borrower that they need more assurances in order to approve the loan request.
It will then be your responsibility to convince the lender that there is little risks, if any, with doing business with you.