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Detouring around loan speed bumps

You've got a job and never missed a credit card payment. Yet, when you applied for a loan, you didn't get the lowest interest rate. In fact, one prospective lender rejected your application. What gives?

In most cases, people who are denied credit have fallen afoul of FICO. This is the name given your credit score; it comes from Fair Isaac Corporation, the California company that developed the rating system. Loan officers use FICO scores to help determine who might or might not make a good loan candidate.

But occasionally, a lender can view someone with a decent credit score as a risk. That's because lenders look at other factors. Some of these issues are considered in developing your FICO score, but your loan officer may review them again independently when considering your application.

It's these loan speed bumps, as Fred Siegel, president of the New Orleans investment firm Siegel Group Inc., calls them, that can put a brake on a loan even when a credit score alone doesn't disqualify a loan candidate.

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Here are some of the bumps and how you can detour around them to reach your financial destination.

Always on the move
People who frequently relocate could find they get looked at a bit longer and harder when it comes to credit. Frequent moves could indicate financial instability. Maybe you're moving to avoid paying rent or because you can't hold a job.

But, in fact, those moves could be a good thing for you and your potential lender. If your company relocated you and each move involved a promotion and bigger salary, that means you could qualify for a larger mortgage. Make sure your lender knows your complete relocation story.

Job jumping
You'll lose lender points if you've frequently changed jobs. Quitting the corporate life to go out on your own can be even more problematic. Lenders want assurance that you can repay a loan and that job changes don't result in a lower -- or no -- salary.

Smooth over this speed bump by giving the lending institution additional information about your career moves. Explain that while you've only been in business for a year, you actually have 20 years' experience in your field. Or, if you've switched fields, explain why your salary won't suffer.

Incorrect creditor complaints
If a company has complained about you, it'll show up in your credit bureau report and be reflected in your FICO score. But if the complaint wasn't justified or you can offer a credible explanation, you might be able to convince the lender that you deserve the loan. (Of course, you'll want to send this explanation to the credit reporting offices, too, so it will become part of your record.)

For example, say you were caught in a dispute between your medical insurance company and your doctor. Because your insurer was slow in paying for your treatment, your doctor turned the bill over to a collection agency. Guess who the collector came looking for and whose credit reputation is now suffering? If you explain the situation to the lender, your loan request may get another chance.

Or maybe you thought that disputed charge on your store charge account was cleared up. The store took it off your bill and you subsequently charged other items there without a problem. Unfortunately, that satisfactory resolution wasn't reported to credit watchers.

Avoid unexpected credit surprises by checking your credit report at least once a year and clearing up any real or explainable problems as soon as you discover them.

Too much credit already
If you have a fistful of credit card accounts, your loan could be derailed, even if the accounts are paid up or you have them simply in case of an emergency. That's because the lender looks at how much debt you could rack up, and this includes the maximum debt limit available on all those accounts.

The route around this speed bump is to minimize your card accounts. If you switch card companies to take advantage of a zero-percent interest card offer, close another one. Experts suggest, however, that you keep the card that you've had the longest because it demonstrates a long-term credit history.

Hey, big spender
People who are living too large generally aren't what lenders look for. A consumer who's been on a spending spree, buying a car and boat and then applying for a mortgage, may find himself shut out of a loan. It's that total-debt-load consideration again.

It depends on the type of loan and how much money you've put down, but, in general, if more than 38 percent of your salary is going to payments, that's enough to trigger a red flag to a potential lender, Siegel says. One solution is to pay down your debt before applying for a big loan.

And if you just can't resist making large purchases, try to space them out over a matter of years, not months.

"Hold out on buying the boat until after you get your mortgage," says Siegel, author of "Investing for Cowards" and "The Richest Man in Babylon Today."

Not telling the whole truth
Yes, you do need to answer all questions, cross all the t's and dot all the i's. An incomplete loan application is just waiting for the "denied" stamp from your banker. Even worse is one that contains wrong information. The lender will check.

"Not providing required information in a timely manner and the inability to verify information that must be confirmed are the two major issues I see that can slow down or stymie a loan," says Janette Davis, senior executive vice president of the community banking division of Florida-based BankUnited.

The key to getting around most of these loan roadblocks is working with your lender. If a loan is denied, make sure you know why.

Siegel recommends that you send a letter explaining how perceived problems shouldn't automatically take you out of loan consideration. Spelling out the issues, rather than letting your lender read between the lines, could make the difference in whether or not you get the money.

Jenny C. McCune is a contributing editor based in Montana.

-- Posted: Oct. 27, 2003
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See Also
Plus: The documentation your lender will want
Estimate your FICO score
Why you should check your credit report
Financial advice glossary
More advice stories

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