Credit Report Explained: Why Loans Are Denied and How to Fix It

Israeli banks often reject mortgage and loan applications not just based on regulatory limits, but also due to factors revealed in a borrower's credit report. While the official debt-to-income ratio ceiling is 50% of disposable income, most banks impose stricter limits, typically between 33% and 40%. Exceeding this can lead to higher capital allocation requirements for the bank, making the loan more expensive and potentially resulting in a rejection even before the regulatory maximum is reached.

Banks are not obligated to provide a reason for denial, but the credit report often holds the explanation. Common issues include forgotten past due payments, bounced checks from years prior, outstanding small car loans, or old co-signments for friends. The credit report details these issues, which can significantly impact a borrower's creditworthiness.

Four main reasons can lead to mortgage rejection: the debt-to-income ratio, loan-to-value ratio, property liens, and negative credit report flags. Fortunately, three of these four issues can often be addressed within two weeks.

Specific negative entries include overdue payments exceeding NIS 200 for 30 days or more after notification, bounced checks reported within ten business days of a warning, account restrictions, or active collection proceedings. Co-signing a loan is also considered a credit transaction, and if the primary borrower defaults, the guarantor's credit can be negatively affected, even years later.

The article also outlines a week-long action plan for borrowers facing rejection. This includes obtaining a free annual credit report from the Bank of Israel, identifying and gathering evidence to correct any errors, addressing short-term debts, and potentially adding a co-signer or restructuring the loan. It also notes that different credit bureaus may provide slightly different ratings based on the same data, and reapplying after correcting issues can lead to a different outcome.