3 reasons young homeowners may get turned down for loans

Patience and planning are likely best money moves for new homebuyer

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question for the CreditCards.com expert

Dear Opening Credits,
Hi, I'm 20 years old. I want to finance a motorcycle, and I want to get a loan for right around $6,000. I recently purchased a house. My monthly mortgage is $790. My annual income each month is $2,400. I also live with my fiancee, and her monthly income is around $1,300. We share all of our money. She pays $180 a month for a car loan, and I pay $78 a month for furniture, and those are all the extra payments we have. Both of our credit scores are around 700. I have never paid anything late and have no bad credit, yet when I apply for a small loan like this, I get denied every time. It seems so strange because this size of a loan is so easily affordable for us. Any ideas of how I could make this loan happen? -- Colby 

Answer for the CreditCards.com expert

Dear Colby,
You're a homeowner at the age of 20? Very impressive! It seems to me, though, that you already have a lot on your plate. In fact, it may appear that way to financial institutions, as well. Here's what's probably preventing them from agreeing to finance that motorcycle:

  1. A big, fresh mortgage. You didn't say what the sale price for the home was, but I'm estimating you borrowed somewhere between $100,000 and $150,000, depending on your down payment and interest rate. That's a large sum, and a bank will want to make sure you can handle that obligation before extending you another loan.
  2. Your credit score is too low. Assuming you're quoting a FICO score, 700 is decent. However, it may not be high enough for premium financing, which is what you want so you don't pay more for the bike than you have to. Understand how credit scoring works and then take steps to increase those numbers by about 50 points.
  3. Insufficient or unstable income. I gather that you and your fiancee are going in on the bike -- otherwise, you wouldn't have mentioned her credit score -- but lenders don't just look at scores and reports to make decisions. They also want to know you have the cash flow to support an additional loan payment. The employment information you both include on the applications will reveal affordability and stability. If the bank isn't confident that you have the extra funds, they'll hesitate.

The last point leads me to inquire about your entire financial picture. Though you list your combined loan obligations as mortgage, car and furniture, certainly there is much more to your monthly budget than that, right? To see if a motorcycle payment is even feasible, you must analyze whether or not you can really afford it. (And I hope you can. As a former rider, I understand the desire to get a shiny new bike.)

Using a comprehensive worksheet, list every monthly expense you have today and in the near future. Include the expenses that come up occasionally, such as gifts, home maintenance and car repairs. Estimate their annual costs, divide by 12, then include those figures into your budget. Be sure to add a savings figure, too. A standard rule is to save 10 percent of your net income for emergencies. So since you bring in $3,700, you should be tucking $370 away. That's not including the money you're saving for retirement because it comes out of your gross income -- as with an employee-sponsored plan such as a 401(k) -- and funding vacations and other big items.

If, after subtracting all of your monthly expenses from your income, you have at least the amount you'll need for the motorcycle payment remaining, then you can feel safe and secure that you can afford it.

After that, you've got to convince the banks that you can. That means taking a bit of time and letting them see how well you pay that mortgage. You didn't mention any credit accounts so I'm going to assume you don't have consumer debt. Keep it that way but do use the cards: You can bump up your credit score by charging regularly and paying in full and on time. 

Finally, you may want to slow down a bit, Colby. You've already done so much to be proud of. You've got a well-paying job, a new home, and soon-to-be wife. Avoid getting in over your head by owing too much money. There may be a little something else down the line who is very expensive ...

See related: Help for bad credit, Ways to squeeze more from your monthly budget, The 5 elements of a FICO score, What you need to know about credit scoring and reporting

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Updated: 03-26-2019