Why can a bank refuse a loan?
Many dream of an apartment or a private home, but not everyone wants the same. What are some of the most common reasons that impede your dream of a home?
One of the biggest obstacles to credit growth in Latvia is the shadow economy and envelope wages. “This is also the most common reason why the borrower’s wishes do not match the options.
Envelope salary – the biggest obstacle
In such a situation, the borrower himself appears to have a sufficient household budget to make a long-term commitment, but in reality, what the borrower sees in his wallet is fundamentally different from what the bank sees in the accounts. The bank’s ability to objectively assess the repayment ability of a loan can only be based on understandable and documented income.
Also, any kind of social guarantee is almost impossible for recipients of envelope wages. This further increases the risks associated with the ability to repay the loan in the long term. Against this backdrop, it has to be realized that in a non-transparent income structure, getting a loan as much as possible is unrealistic, ”explains Ainars Balcers.
The period over which the borrower’s income is assessed is usually six months, but in some cases, for example, when income is volatile, income may be valued over a longer period.
The down payment is not sufficient
Another important reason why people are forced to postpone a home purchase is the fact that the amount of money required for the down payment is missing or there is no down payment at all. “Typically, the down payment required for a home mortgage is between 15% and 20%. Assuming that the transaction amount is 60,000 dollars, the amount that should be accumulated is between 9,000 and 12,000 dollars. In addition, the costs involved in drawing up both the credit agreement and the purchase agreement (notary, taxes, etc.) must be taken into account. It is very difficult to raise such a sum of money within a reasonable period of time, especially if you have to rent a home in parallel, ”says a bank expert.
Currently, the situation is well addressed by the Good Finance State Support Program for Families with Children. This program makes it possible to get a mortgage loan for the purchase or construction of a home with a down payment of 5-10%.
This is a much smaller amount of money, and in the case of a similar example already mentioned, the first installment would have to be between 3,000 and 6,000 dollars. With a stable income and a balanced household budget, it seems more realistic to accumulate this amount over a reasonable period of time.
However, it should be noted at the outset that the program is open to a limited section of the public, so it is important for the state to look into ways to make this support program wider and more accessible to others.
Negative credit history
Lending has always been based on mutual trust, so it is also important to evaluate how a potential borrower has treated his payments so far when making a loan. Unpaid bills or overdue credit payments may also be the reason why you are unable to get the financing you need. Even if such delays were due to carelessness or forgetfulness, in the future it could mean that it will be more expensive to borrow and you may have to pay more in percentage. Therefore, it is important to remember that credit history matters and it is important to treat your payments very responsibly.
The systematic use of so-called “quick credits” also makes the bank cautious. True, as a bank expert explains, fast credit is not in itself a reason for the refusal. “Borrowing in quick loans is rather a signal that the existing liabilities are too high, there are problems with the payment of the existing obligatory payments, or the reason is the above mentioned envelope wages. Otherwise, it would be difficult to understand why a person chooses to borrow at ten times the interest rate in the non-bank system. In addition, it is now possible to get a consumer loan through a mobile app at a bank, and it only takes 15-20 minutes, ”says Ainars Balcers.
What should a salary be in order to borrow, or what is a balanced budget?
It is generally assumed that the balance of income and expenditure should be such that the aggregate of all credit payments can be deferred to around 30-40%. “It may be a starting point, but not a one-size-fits-all solution because, for example, if you have a higher income, you can also put more credit on stake. Conversely, people with lower incomes may also have 20% too much to put off monthly payments. Therefore, the borrower’s solvency must be judged from the overall perspective. In my opinion, a positive account balance at the end of the month is also what you can afford to pay for the credit. It also requires planning how much I can borrow, ”says a bank expert.
There can be no caution when it comes to assessing your ability to repay long-term credit. The bank’s desire to understand the customer’s income and expenses is not just to assess the credit risk on its side. The Bank also assesses and assists the borrower in assessing risks.
“A person borrows bank money but has to give back to his or her own, so in the case of borrowing, both parties bear the risks. And that’s why assessing long-term solvency is critical, both for those who lend money and those who borrow money.
The bank has a great deal of experience in this respect, and I think it adds value to the borrower himself. If I am not a mechanic, I do not repair the car myself – similarly with loans, ”explains Ainars Balcers, stressing the importance of a security buffer when assessing long-term ability to repay a loan. “It should be borne in mind that the situation may change over the course of 20 to 30 years, for example, income may fall or expenditure may increase, and interest rates may also rise – these are very important!”
Maybe just rent?
In the world, it is considered to be a relatively popular philosophy not to buy, but to rent or use only as much as necessary. It allows you to adapt to different situations and easily change residence as needed. “Your home is about security and stability. As soon as children arrive in the family, this aspect is given special attention. People are different, of course, but in my opinion, a regular change of residence, for example for children, can also be quite stressful.
When you change your place of residence, it probably means another environment, another school, friends, family doctor, etc. Therefore, families with children would most likely prefer their home. Young people who have no family yet or are just looking for a place to live are more flexible on this issue, so renting is probably the best option for them, ”says Ainars Balcers.