During a loan underwriting, the lender checks whether the borrower is fit for loan approval. The bank and financial institution make a judgment if the borrower has the capability of paying the loan back to the lender based on various factors like credit, debt utilization, income, etc. Though the loan application process is simple, the borrowers sometimes make certain mistakes, leading to rejection. Thinking that your loan application might get rejected is the worst thought, isn’t it? Know the most common loan underwriting mistakes and how to avoid them.
How to Avoid Loan Rejection?
Be wary of the following and avoid mistakes in loan underwriting:
1. Not Knowing Eligibility Norms
Though every lender may have different loan approval criteria, you should know the most common ones. The borrowers do not check all the loan eligibility norms like minimum age, minimum income, citizenship status, debt status, credit score, etc., and face loan rejection later. So, before applying for a loan, be sure to check the lender’s expectations, fulfill the same, and then apply.
2. Submitting Incorrect Details or Invalid Documents
One of the most common mistakes in loan underwriting is not filling out the application form correctly or submitting valid documents. When filling out the application form, the borrowers are sometimes in a hurry. They either forget to mention a mandatory detail or write it incorrectly. The same happens with the documents. You might face instant loan rejection if you miss writing important information or do not attach an asked paper.
The lenders have low tolerance towards incomplete or incorrect forms and paperwork. You should review the application and all necessary documents to eliminate this risk.
3. Credit Negligence
Borrowers who have a habit of neglecting their credit and showing a casual attitude toward loan bill repayment often face loan rejection. The lenders check the credit behavior of all the loan applicants before saying ‘yes’ to it. So, the borrowers need to remain responsible and not allow any negative entry in the credit report.
The underwriting process relies heavily on your credit score, too. Any default or payment irregularities can bring your score down. Ensure to maintain and boost your credit score before starting the loan application process.
4. Ignoring Debts
If you have already taken too many debts, and some of them are still unpaid, you might be making a mistake. The loan underwriters check your existing debt, and if they find that most of your income goes into paying the debts, that is not a good sign for you! For loan approval, the lenders should be sure that the borrowers’ have the ability to manage extra debt. When the lender finds that the borrower might struggle with the new financial obligation and default on the loan, they may not pass it.
So, the best way to upscale your loan approval chances is to reduce the debt.
5. Bigger Loan Amount
When you apply for a bigger loan amount in the application form, it may be difficult to get it approved. A loan of a higher amount will face a lot of underwriter’s scrutiny. They might raise questions or concerns, ask for additional paperwork, etc. Also, if you apply for a bigger loan than you can pay, you might increase the risk of defaulting. Defaulting the loan will upset your credit and lower the chances of getting loans in the future.
6. Not Responding to Lender’s Mails/Calls
Sometimes, when a lender has a query about your loan application or documentation, they try to reach you through emails or calls. Not responding to them might lead to loan rejection. Stay alert during the loan underwriting process to eliminate misunderstandings and foster uninterrupted collaboration.
Wrapping Up
Loan underwriting might seem like a daunting process in the beginning, but if you know how to avoid mistakes, then it will be a cakewalk! Pay careful attention to the mentioned loan details, attach correct documents, boost your credit score, be alert to lender’s queries, and more to ensure successful completion of loan underwriting.
FAQs
1. How to avoid common underwriting errors?
Ans. The most common mistakes in the loan underwriting process include incorrectly filled application forms, invalid documents, low credit scores, not knowing the lender’s eligibility rules, not answering to lender’s queries, etc.
2. What does it mean to have clear communication with the lender during loan underwriting?
Ans. Effective communication during loan underwriting means answering the lender’s calls and emails. Sometimes, when the loan underwriter finds a detail confusing, they call/mail the borrower, asking for an explanation or clarity. When the borrower is not reachable, they may not approve the loan.
3. Does asking for a bulky loan amount may not get it approved?
Ans. If you apply for a bigger loan amount, be ready for the underwriter’s scrutiny. They might raise questions or concerns, ask for additional paperwork, etc. Also, after checking your income, if they think that you cannot afford it, they will reject your loan.
4. If I have multiple debts going on, can I apply for a new loan?
Ans. The loan underwriter checks your total debts before approving the loan. If they think you are exceeding it while keeping your income in mind, they may not approve your loan. So, borrow only when you have the repayment capacity, and there is no risk of default.
5. What should I do if my loan does not get approved?
Ans. Determine the reason for loan rejection, like low credit score, too many debts, poor payment history, default, etc. Once you know the reason, work to correct it and then apply for a loan again.