The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.
Loan Application Rejected? Do This.
Your loan application is complete. You made it through the paperwork and now you’re just waiting for that magical notification: “Congratulations, your loan has been approved!” Instead, you get a big ol’ (sometimes literal) red-stamp of rejection.
It’s tough not to take a credit rejection personally, especially when you think you’ve done everything right. Luckily there are some simple changes you can make to ensure that you look great to creditors! But first, you’ll need to understand why your loan application was rejected.
6 Common Reasons for Loan Rejection
1. Your credit score is too low.
Most lenders have a minimum credit score requirement in place to obtain a loan. If your score is 699 and your lender’s minimum is 700, that doesn’t mean you’ll automatically be denied. Other considerations such as income, debt load and payment history factor into their decision. However, if your credit isn’t perfect, taking steps to raise your FICO® Score before you apply is always a smart bet.
Improve your credit by:
- Paying down more of your debt.
- Keeping credit card balances low.
- Holding off on new credit applications.
- Signing up for a program that takes on-time utility/phone payments into account, such as Experian Boost or Credit Karma.
2. Your payments have been late.
Your credit report tells lenders whether you’ve missed payments on your loans, credit cards and other debts, as well as how late you’ve been. Check to see if any late payments have been reported incorrectly to the credit bureaus. If yes, take steps to correct the error1 before applying for a loan again.
If you have been late on payments in the past, focus on making on-time (or early!) payments going forward. Try setting up AutoPay in online banking to help you build a positive payment history.
3. Your debt load is too high.
Lenders also take your total debt amounts into consideration. You might have a great mix of credit types (loans, credit cards, etc.) and a spotless record of timely payments, but you carry debt amounts that are simply too high for your means. Which leads us to #4 …
4. Your income is too low.
When it comes to income and debt loads, there isn’t a set number that lenders are looking for. Rather, they are looking at your debt-to-income ratio, which gives lenders a general idea of how likely you are to be able to pay a debt.
For example, an individual salary of $80,000 sounds pretty good considering that the average household income in Arizona is around $60,000. But if you have $100,000 in student loans, an $18,000 car loan and $12,500 in credit card debt, that $80,000 might be pretty tight!
In order to affect your debt-to-income ratio, you’ll need to: a. earn more money, b. lower your debt or c. do a combination of both.
5. There are red flags in your history.
Lenders don’t just look at the payments you’ve made. Creditors take many factors into account when reviewing your application, including employment and rental histories. If you’ve changed jobs five times in the last two years or you constantly have a new address, that’s a red flag for lenders. Also, lenders may be wary of applicants who have recently switched companies or opened new credit, as these could be signs that your life is currently less stable than they’d like.
6. You don’t have enough saved.
A down payment of at least 3% is required for a home loan (some loans require more), along with closing costs that are typically 2-5% of the home’s value. Auto lenders may also require money down when you purchase a vehicle. Lenders will look at how much you have saved toward that goal. If you’re short — or just barely have the dollar amount you need — your application may be denied.
Remember, it’s not a punishment. Lenders simply want to make sure that you have enough money for your down payment and other costs (processing fees, title fees, inspections, etc.) and won’t be strapped when these amounts are due. If you get a rejection for this reason, start looking at ways to buckle down and save a little extra money before applying for a loan again.
What Do I Do Now?
Request a Reconsideration:
If your loan application was denied because of something fixable such as incomplete or incorrect information, you may apply again once the errors have been corrected. Start by looking through each line of your application to ensure it is 100% correct. Gather together all of your supporting documents and double-check everything your lender flagged as a problem before you resubmit.
Build Your Credit:
If your credit score is an issue, or you have any blips in your payment history, you have a few options. First, you can look for lenders with less strict requirements. The downside of doing this is that you may get less desirable terms or interest rates. Alternatively, you could make some short-term changes to bump up your credit score quickly or take a longer-term approach to building a solid credit history.
Focus on Debt and Income:
If your debt-to-income ratio is the issue, look for creative ways to raise your income or decrease your debt.
- Consolidate high-interest debts.
- Pay more than the minimum balance.
- Don’t open new accounts.
- Try the snowball, avalanche or waterfall methods2
- Take a second job. (Read our article on “Is it worth it?” first)
- Ask for a raise.
- Work overtime (if hourly).
- Join the gig economy3 and do freelance projects.
The Next Steps
If your loan application was rejected, denied or declined, don’t lose hope! Most lenders are happy to provide an explanation for why your application was denied. Once you’ve discovered the reasons for the denial, you can take smart steps to better prepare for next time.
With a little extra work and a solid strategy in place, you might see the words “Congratulations, your loan has been approved!” sooner than you think.