If you don't pay attention to the documents you send for the analysis of your mortgage application, it can be refused. And this refusal can happen even if you can afford the monthly payments. Learn more about this.
Approving a home loan is sometimes not easy, since not everyone is aware of the minimum requirements for a bank to grant a loan. Even if you are not well informed about what an institution takes into account, your credit can be refused for simple details.
For a financial institution to lend you the amount you need, it needs to carefully evaluate your risk profile as a client. And for this, the institution will ask you to submit numerous documents.
If you don't pay attention to the documents you send for the analysis of your mortgage application, it can be refused. And this refusal can happen even if you can afford the monthly payments.
However, to better understand the reasons behind this refusal, we present the necessary information about the documents you send for credit analysis and the care you should take. We also reinforce how to solve this type of situations and what to analyze before sending all the documentation, based on an article by Doctor Finances.
Analysis of a credit request
When you apply to the bank for a credit, there is an analysis stage to obtain pre-approval for the loan. At this stage, the financial entity analyzes the risk of allocating the amount you have requested. And to establish the risk profile as a customer, there is a detailed analysis of several components, such as professional and financial situation.
If professionally you are in a stable situation, with an open-ended employment contract, the risk analysis mainly focuses on income, effort rate, and history as a payer.
Although there are other components of the analysis, such as age and number of credit holders, for banks it is essential to understand the ability to repay a credit in the long term. And if a bank detects that you have defaulted on payments in the past or finds that you are currently in default, it is normal that the credit application is refused.
However, how do lenders understand your history as a payer? Through the requested documents. For example, in the analysis phase for pre-approval of a home loan, financial institutions ask for the following list of documents:
- Legible and up-to-date Identification Document
- Last IRS Declaration
- Income Statement
- Contractual relationship statement (issued by the employer)
- Green receipts (last 6 months)
- Salary Receipts (last 3 months)
- IRS Settlement Note from the previous year
- Bank statements (last 3 months)
- Declaration of Start of Activity (if applicable)
- Statement of Responsibilities from the Bank of Portugal
- Proof of IBAN
- Proof of address
- Last statement of each of your Credit Cards
Some of these documents may determine the refusal of a credit.
Denied credit based on salary and effort rate
In some financial institutions, there is not always the care to explain to customers why they have been refused credit. And in these cases, customers are left without knowing what was at the origin of this refusal and what they can improve in the future to change this situation.
For example, customers easily understand the refusal if it is linked to the financial capacity to support a loan. The institution analyzes the income, based on the IRS, pay slips or green receipts.
Subsequently, the effort rate is calculated. The effort rate analyzes the relationship between a household's net monthly income and its expenses. However, the expenses that carry weight in this calculation are associated with credit.
If the result of this calculation is higher than 30% for a mortgage, the bank may consider that there is too high a risk in granting a new credit. However, when the effort rate is less than 30% this does not automatically mean that you have the green light to pre-approve the credit. After all, this is not the only component that influences the risk level of a customer.
Documents that show history as a payer
If you look at the list of documents requested in the mortgage loan, you can notice that bank and credit card statements are also evaluated. In addition to these documents, one must present the Mapa de Responsabilidades from the Banco de Portugal. And through these documents an institution can understand if you have a history of being a good payer or not.
In other words, from the statements you can see how your bank account is managed. This means that you analyze how much money comes into and goes out of your account each month. However, it is also analyzed if in those months the balance was negative, for example, if you use the credit cards balance to meet your expenses and if there were delays in the payments of some charges.
Through the Bank of Portugal's Map of Responsibilities, the entities validate if the client is on the Bank of Portugal's "black list". With this map, the institution has access to all active credit to date. If you have overdue payments on one or more credits, you are in default. Thus, your request for credit pre-approval will be easily denied.
However, there is another document that goes unnoticed that can show your history as a payer. This document is the proof of address.
Normally, proof of address is given in the form of a bill, whether it is a bill for electricity, water or telecommunications. Although this document serves only as proof of address, it also reveals other data. For example, if you have an overdue bill or there is an outstanding amount, this information will appear on the bill. And even if that amount is settled and you send proof of payment, it can be seen as a sign of risk.
How to avoid being turned down for sending documentation
Although there are contexts that are impossible to avoid if you do not pay off or renegotiate your debts, such as getting off the Banco de Portugal's black list, there are details that can change the outcome of the credit pre-approval request.
First of all, you should check all the documents in your possession before sending them for analysis of a credit application. If one takes into consideration that the bank statement of the account refers to the previous three months, one should strive to optimize management and improve practices.
Besides having a good "presentation card" for the financial entity, adopting good management practices improves personal finances and avoids possible fee charges. As for the statements associated with credit cards, only the last month is evaluated. Therefore, one should pay attention to the deadlines for payments, and if possible, always try to make 100% payments.
Remember that a rejected credit doesn't mean that you can't achieve your goals through a loan. Sometimes all you need to do is to be well informed about the granting of a credit, try your best to improve your conditions, and take this step at the right time. If you need help, ask an experienced credit intermediary to handle your process.
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