What should you do if the lender rejects your application?

Has your loan application been declined? Have you made an entire business plan around this short-term mortgage, and the answer is, “Sorry, not this time!” Do not worry; sit back and relax. You are not alone in this situation, and many applicants face rejection of loan applications. If your application is rejected, keep pursuing your goals. Figure out the problem before applying for alternative funding.

1. Understand why the lender rejected your application

The first step is to find out why this application was unsuccessful. Unfortunately, the lender rejected your loan application, but it is important to look into the details and make sure your assumptions are correct. That way, whenever that happens, your next application may have a better chance of success. Applying for a loan too often can result in all applications getting rejected and hurting your credit score.

Here are some reasons why lenders decline 1st mortgage or business loan applications:

Low credit score

Bad credit will adversely affect your application for a business loan. The lending institute will immediately decline the loan application. A credit score is a number that you must maintain to avail of business loans at low-interest rates. Checking your credit score and obtaining a credit report is mandatory for traditional lending options, however private lenders do not have this criteria.

Incomplete application or documents

In addition to the loan application, the applicant must submit loan documents specified by the lender. You must submit all requested documents with the necessary details to complete your application. You should not submit incomplete, lost, false, forged, or counterfeit documents to any financial institution. It can lead to rejection.

Lack of effective business planning

Every borrower should be aware of the type of business loan for which they are applying. To be successful, you should prepare a specific, self-designed business plan and present it properly during your loan application. Traditional Banks hesitate to lend to business owners and entrepreneurs without a business plan and adequate business information. Whilst banks have this criteria again private lenders have much less requirements.

Inadequate cash flow or collateral

A company’s cash flow is the primary source of information lenders use to assess the ability to repay the loan. Insufficient cash flow can cause banks to lose confidence in you, leading to 2nd mortgage loan declines. Maintain proper cash flow by arranging bills and eliminating extra charges.

Second, not all banks offer unsecured loans. For startups, business owners, and corporations wishing to apply for secured business loans or secured loans, it is mandatory to provide sufficient collateral required to get the loan amount. Again, insufficient collateral by the applicant will result in the refusal of the loan. You can submit collateral, including residential or commercial real estate.

Credit Beginner Startups or Applicants

A “New Credit” is a customer with no current or previous credit use and does not have or maintain a credit score. These clients who want to start their businesses need help getting loan approvals or having a loan declined, as banks classify them as high-risk applicants. Therefore, a “credit newbie” or startup applicant who is not very familiar with the banking industry should first start using basic credit products such as credit cards. When using a credit card, the Customer should not maintain a high credit utilization rate above 30% of the total approved limit. After building a satisfactory credit score, a traditional bank may then look at an application, however private lenders are also an alternative for a short-term mortgage.

2. Remove errors and negative comments from your credit report

After identifying the reason for rejecting the 1st mortgage application, check your credit report. Report copies are available free of charge from all three credit bureaus. Negative grades can affect your creditworthiness. When reviewing your credit report, ensure each account listed is yours and is accurate.

You can appeal any inaccuracies in your credit report to one of the three credit bureaus. You can pay any credit repair company to pinpoint the bad points or do it yourself. You are free to object to any incomplete or inaccurate information.

3. Other important eligibility improvements

In addition to removing errors and negative comments from your credit report, a borrower should consider improving the following key factors to improve your loan application.

Credit score

Poor credit may result in the rejection of your 2nd mortgage application. Traditional lenders use this score to assess their risk as borrowers. Different lenders consider varied scores to be good, average, or bad. To know the perfect credit scores, you must see the eligibility criteria of respective lenders. Some tips to improve credit score are paying back on time, limiting the use of credit cards, and paying all the utility bills timely.

Debt to income ratio

Lenders can also reject 1st mortgage applications if the DTI ratio is too high. Look at this number to gauge your ability to repay your new loan while managing your current debt. Lenders generally prefer a ratio of 36% or less. However, in some cases, they may consider applications with up to a percentage of 50%.

To calculate your DTI, the lender divides the current monthly debt burden by your monthly income. For example, if your current monthly debt is $3,000, your gross income is $4,000, and your DTI ratio is 75% ($3,000 / $4,000).

Increase Earning

Increasing your income is easier than doing it, but it can help you earn more credibility. The higher your income, the lower your DTI ratio may be. You will likely meet the lender’s minimum DTI requirements. To increase your income, consider starting a lucrative side business or mastering a popular skill to increase your earning potential.

End Verdict

Feel free to ask the lender to explain why they have declined the short-term mortgage application. Before applying for another loan, double-check your credit report to ensure everything runs smoothly. See if your credit score has improved. To increase your chances of approval, you should wait until you meet the lender’s requirements or choose another lender better suited to your financial situation. Always remember that although traditional lenders have arduous criteria to meet private lenders have a much more relaxed approach to business lending.

Can Short-Term Mortgages Be Advantageous For Business Owners In New Zealand?

Everyone, whether a company or an individual sole trader may face financial crunches from time to time. Short-term mortgages where a business owner borrows money for one to twelve months can be an enormous relief in such a time. A business can borrow money during low season sales, to cover daily expenses, expansion, and more. A sole trader may need a loan to cover unexpected expenses. Whatever the reason, a loan for a short term offers several benefits.

Advantages of short-term mortgages for business owners in New Zealand

Let us now check out the various benefits of short-term mortgages for business owners in NZ.

1. Short-term loans get approved quickly.

One significant characteristic of short-term loans is quick approval. In comparison to traditional loans, these get approved within 1 business hour. You do not have to pass through an extended application process for approval. So businesses can rely on short-term loan lenders to meet unforeseen expenses by getting funding in 24 hours.

2. Simple application process

Getting a traditional loan from a bank or a financial institute is tough. A start-up business and individuals having poor credit scores will not qualify for a long-term loan. In such cases, a short-term business loan is a lifesaver. Due to the low-risk factors, lenders agree to lend to people even with a bad credit score.

3. Competitive interest rates and less interest to pay

The duration of short-term loans varies from one month to one year. The loan amounts are normally less than long term mortgages. Therefore, the interest you pay over the term is a lot less. Long-term loans involve borrowing large sums of money for a period of 10 to 30 years. In a short-term loan, you will surely end up paying less interest than in any other form of financing, as the term is months not years. Although interest rates may seem higher, you only have to pay it for no more than a year. This way, you will save money in the long run. Paying less interest means saving money. You will save thousands of dollars if you opt for a short-term loan rather than a 30 to 15 years loan.

4. Short-term loans on mortgages offer low-interest costs

Short-term business loans usually have higher interest rates. But in the case of a first and second mortgage, low-interest rates are generally offered for a short period. So along with paying for a shorter duration, you can also pay a lower interest rate. T

5. Short-term business loans are handy

Short-term business loans are a lifesaver in liquidity problems during an emergency. Small businesses and start-ups cannot generate revenue and sometimes need assistance with cash flow. Cash flow and capital are everything for them. They need money for everyday expenses and business expansion and growth. Imagine a scenario when you are in an emergency and need to purchase a piece of equipment for your company. Investing in that equipment will reduce the available funds from your working capital, and not buying it will mean lagging behind the competition. Securing a short-term business loan is your way out of many similar situations.

6. These loans can help in improving your credit score

You can boost your credit ranking by obtaining a short-term loan. The credit score algorithm favors such loans. New businesses do not have a credit history. No one wants to lend to a startup, and you may find yourself in a dilemma of where to begin from. Short-term loan lenders are ready to lend you money but at a higher interest rate than traditional ones. These loans are the best way to start building your credit score until you become eligible for funding approval from a bank or a financial institute. You can later borrow on low-interest rates once your credit score has improved.

7. Predictability of financial situation

The duration of a short-term business loan is a year or less. You can get an idea about the financial situation of your company in the next 6 to 12 months. Determine the best repayment term with your current income and expenditure.

9. Your business is stress-free

You do not have to worry about interest and principal payments. Borrow money for a short duration, pay it off and borrow again when you need it. These loans generally impose less burden on your business.

Final Thoughts

Short-term business loans are known for higher interest rates. However, when applying for a second or 1st mortgage, you can get them at a competitive interest rate. It is a convenient form of finance for businesses to meet unexpected expenses.

First Mortgages: What You Need to Know

1st Mortgages are the most common type of mortgage offered by banks and private mortgage lenders. But before we get into all you need to know about first mortgages, it best to explain what a 1st mortgage actually is.

A mortgage is a legal instrument that gets placed on a land title in order to secure a debt against that property. The debt is therefore known as a mortgage.

If there are no other mortgages on the land title, the land title is known as being unencumbered. Which means there is no encumbrance on the land. Therefore there is no debt on the lend.

When a mortgage is applied to an unencumbered land title, that mortgage is then known as a 1st mortgage and has 1st ranking priority over that land, and remains until the debt is repaid.

However it is possible for the person who owns the property to get another mortgage against their land title. This additional mortgage is known as a 2nd mortgage as it sites behind the 1st mortgage. Therefore this means the 2nd mortgage has 2nd priority over the land.

So if the property gets sold, the 1st mortgagee gets its money first, and the 2nd mortgagee gets its money after that, so long as there is money left over.

This makes 2nd mortgages more expensive than 1st mortgages, due to the higher risk.

Why would someone need a 1st mortgage?

If you own a parcel of land, or a house or unit, and you need access to money, then you have two choices. Sell the real estate, or borrow against it. If you love the property and you don’t want to sell it, but you really need the money, a 1st mortgage is the perfect solution.

You simply get the money now, and pay it back over anywhere from 12 months to 30 years. Best of all, you still get the keep though property.

When you borrow money against your real estate assets, you are taking out a mortgage against the property.

This means if you don’t repay the loan when it is due, the mortgagee has the legal right to take possession of the property and sell it in order to get their money back.

So it’s important to seriously consider a few things…

Do I really need the money?
Can I afford to repay the money, with interest?
What happens if I lose my job or my business fails?

Whilst mortgages are great, you need to ensure you can live with the cost of the mortgage and the impact it has on your disposable income.

Many Business Owners will also use a 1st mortgage to access cash for their business. This is like using the equity in your home to make more money in your business. Its pretty clever when you think about it, however again, you have to seriously think it through.

The best part about a 1st mortgage for business purposes is that the costs of the 1st mortgage loans, as well as the interest are fully tax deductible.

However this tax deductibility does not apply to normal home loan mortgages on your principal place of residence. (i.e.: your primary home where you live)

How do I get a 1st Mortgage?

You can apply for a first mortgage from your bank or non-bank lender, or private business lender. The first thing the lender will do is order a property valuation. This is so the lender knows how much the property is truly worth. However at Homesec Business Finance we do not require formal valuations.

The next thing is how much the lender will lend to you, using your property as security. Lenders will use a calculation known as a Loan to Valuation Ratio, or LVR. If the lender says they will lend to an LVR of 75%, this means they will lend you 75% of the property’s value.

Many people wonder why a bank or private mortgage lender won’t lend the full property value. This is because the mortgage lender needs a buffer in case you default of the loan and they have to sell the property to recover their money.

When a mortgage lender sells a property, there is going to be legal costs and agents commissions. Plus the property has to be sold quickly by the mortgagee, so a sale known as a Mortgagee In Possession sale. So with all of these things taken into consideration, this is why the mortgage lender can often only lend to 75% of the property value.

Watch Out For lenders Mortgage Insurance (LMI)

This only applies to 1st mortgages funded by banks for consumer purposes. LMI is an insurance that is applied to a loan with an LVR greater than 80%. The ironic part about Lenders Mortgage Insurance is the borrower pays for it, but it’s the lender that the insurance protects.

Lenders Mortgage Insurance is simply there to protect the 1st Mortgagees money in the event of a mortgagee sale and property sells for less than the LVR they lent at. As mentioned, LMI only applies to high LVR loans.

If at all possible, it is better if you can save a larger deposit and keep your loan under 80% LVR. This helps you avoid LMI, which will save you tens of thousands of dollars. LMI is essentially dead money to you, as you don’t see any of the benefits from it.

Unlike the banks and commercial lending institutions, Private 1st Mortgages are generally only up to 75% LVR. So LMI doesn’t apply to Private 1st Mortgages.

Private 1st Mortgages are often funder much fastest than bank mortgages, and often with less paperwork and less hoops to jump through. You may get less options with a private mortgage, and they may be a little more expensive, but the speed and convenience is definitely a lot better than a bank mortgage.

With any finance product, make sure you do your research and get the 1st mortgage that is right for you.