You found the investment opportunity you have been looking for. Your offer has now been accepted and you are eager to waive the financing condition. You have submitted a financing application through your lending advisor or directly to the lender and are anxiously waiting to hear back.
Declined is the answer! Not what you were hoping to hear.
What happened? Here are the top common reasons for why a lender may decline financing. It is important to recognize that not all lenders are equal. Lenders differ in terms of:
- The geographic focus of where they lend. Some lenders are not willing to lend in cities or towns where property value fluctuates or the local economic fundamentals are weak (i.e. lack of job growth, infrastructure expansion).
- The property types they lend against. Some lenders for example shy away from lending towards student/rooming houses or rental properties altogether.
- The number of rental properties one can own. Some lenders will finance a maximum of two rental properties per individual/entity. Others are willing to go with five, while some may not have a limit.
- The criteria they use to evaluate the strength of a particular application. Each lender has its own qualification ratios for evaluating applications. Some lenders accept higher investor debt load relative to overall income levels than others and some will consider the strength of the property over the applicant’s.
- Product offering. Lenders differ in the client segments they focus on. For example, some have good products for self-employed or clients with challenged credit, while others don’t. They also differ in terms of the extent of support documentation required from the client to close the deal.
- How they factor in rental income. Lenders differ in how they look at rental income and how much of it will be factored in the evaluation of your application. It would be nice to factor 100% of the rental income on your application. The reality is that lenders factor in only a percentage (typically between 50% – 80%). Some would consider it extra income, while others look at rental as a way to offset rental expenses.
- The structure under which they finance the deal. Some lenders won’t finance deals that are set up under a corporate structure. Simply because they perceive it as a higher risk deal due to the effort/costs associated with dealing with multiple parties if a foreclosure has to take place.
It is so important to send your application to the “right” lender not just the one offering the lowest interest rate. The “right” lender is one who’s lending philosophy (encompassing all of the above factors) is in line with your specific situation and needs. Sending your application to the wrong lender will result in a decline.