- What to Do If Your Loan Is Denied
- Other Reasons for Denial
- What to Do When Your Loan Application Is Denied
- 1. Find out why your application was denied and correct the issues
- 2. Use collateral or a cosigner
- 3. Make a larger down payment
- 4. Apply for a loan elsewhere
- What To Do When Your Mortgage Application Gets Denied
- Find out why you were denied
- Examine your credit
- Pay down your debt
- Look for help with student debt
- Shop around
- Learn more:
- Mortgage Application Denied? Here’s What to do Next
- Why would a home loan be denied?
- Debt-to-Income Ratio (DTI) too High
- Poor Credit
- Low Down Payment
- Unstable Employment
- Unexplained Income or Expenses
- Missing Information
- Risky Moves After Pre-Approval
- Low Home Appraisal
- Before Applying for a Mortgage
- 1. Know Your Credit Score
- 2. Manage Your Debt
- 3. Manage Your Expectations
What to Do If Your Loan Is Denied
If you've recently applied for a loan and your application was declined, it may feel an insult. It's nothing personal, though, and there are several potential reasons for the denial.
To improve your chances of getting approved the next time, it's important to understand why you were denied and how to make the right changes to increase your odds of getting approved.
Two primary factors lead lenders to deny loan applications: problems with credit and problems with income. In some situations, however, other factors may also contribute to the decision.
Your credit history and credit scores are primary factors lenders consider when you submit a loan application. If lenders see any significant negative items on your credit report or other red flags, they may determine that as a borrower, you're too risky to approve at this time.
Common negative items that can cause a denial include:
- Collection accounts
- Delinquent payments
- High credit card balances
- Too many recent credit inquiries
- Not enough credit history
You can also be denied if your credit score is lower than the lender's minimum requirement. To prevent this from happening again, make sure you know your credit scores and shop around for loans that are targeted to your credit range.
If you are not approved for a loan, you will receive what's called an adverse action letter from the lender explaining why.
By law, you're entitled to a free copy of your credit report if a loan application is denied. The lender should provide instructions in your declination letter for requesting a free report from the credit reporting company the lender used to make its decision.
If you don't receive these instructions, you can still request your report directly from the credit reporting agency listed on your declination letter. With Experian, for instance, the Report Access page offers instant access to your report through a secure, encrypted connection.
If your lender denies your loan application income, two issues are the ly culprits. The first is that your income doesn't meet the lender's minimum requirement. Unfortunately, most lenders don't publish this information, so it's hard to know if your income is high enough to garner loan approval.
The other reason is that your debt-to-income ratio is too high. You can calculate this ratio by dividing your total monthly debt payments by your monthly gross income.
For example, let's say you earn $5,000 per month and have the following monthly debt payments:
- Mortgage: $1,200
- Student loans: $300
- Auto loan: $350
- Credit cards: $150
Your total monthly debt obligation is $2,000, giving you a debt-to-income ratio of 40%. If you applied for a mortgage loan, the maximum ratio to get a qualified mortgage is 43%, but many lenders prefer a ratio of 36% or lower.
With other loan types, the maximum debt-to-income ratio varies by lender. But if yours is too high, it's a sign that the lender believes you may have a tough time keeping up with all your payments.
To improve your chances of getting approved the next time you apply, work on paying down some of your debts.
Other Reasons for Denial
While your credit and income are the primary factors lenders consider, they don't tell the whole story. As such, you may be denied other reasons, such as your employment history, residence stability, and cash flow or liquidity problems.
While you may not have a lot of immediate control over some of these issues, take the reasons seriously and wait until you're in a better position to apply again.
When a lender or creditor asks a credit bureau to look at a consumer's credit report, an inquiry is posted to the consumer's credit report. A credit inquiry can be hard or soft.
Almost every time you apply for credit, the lender will run a hard credit inquiry.
For most people, a hard inquiry knocks less than five points off their credit score, but that little dip will not last long—24 months at the most.
Approval decisions for loans are made by lenders, not any of the three nationwide credit reporting companies, Experian, Equifax, and TransUnion. Also, your credit report won't indicate whether a loan application was denied, so getting denied won't impact your credit score in any way.
Whether you need money to finance a large purchase, cover living expenses or consolidate debt, it's possible to do so with bad credit.
Specifically, some lenders specialize in working with borrowers with bad credit and have less stringent credit requirements. The catch is that your interest rate will generally be higher than what you'd qualify for with fair, good or excellent credit.
Another way to borrow with bad credit is to get someone with good credit to apply with you as a cosigner. Some lenders allow cosigners to improve your chances of getting approved. Even if you can get approved on your own, enlisting a cosigner with a great credit history can help you score a lower interest rate.
Keep in mind, though, that cosigners are equally responsible for paying off the debt. So if you default, it could damage both your and their credit history.
Find the best personal loans in Experian CreditMatch™.
While it's possible to get approved for a loan with less than stellar credit, you may be better off waiting so you can get better interest rates and save money.
For example, let's say you want to get a personal loan for $5,000. If you have fair credit, you might qualify for an interest rate of 25%, while someone with good credit might get an interest rate of 15%. Over three years, you'd pay $2,157 in interest, while they'd pay $1,240.
If you can wait until you can improve your credit scores before applying for the loan, it could save you on monthly payments and interest charges over the life of the loan.
To improve your credit, focus first on the reasons included in your declination letter. Take advantage of your free credit report and check to see if there's anything else you need to address.
Regardless of the reason for your denial, focus on practicing good credit habits:
- Make your monthly payments on time. Your payment history is the most important factor in your credit score, and payments that are late 30 days or longer show up on your credit report.
- Keep your credit card balances low. Your credit utilization—your total credit card balances divided by their total credit limits—is another important factor in your credit score. If you have high balances, pay them down as quickly as possible, then keep them low going forward.
- Avoid too many hard inquiries. If your loan application was denied, it can be tempting to apply until you get approved. But while each hard inquiry doesn't have a big impact on your credit on its own, multiple in a short period can be a red flag for lenders.
- Check your credit reports. Review your credit reports regularly to make sure they are accurate. Get your free credit report from Experian here.
Improving your credit can take time. But if you do it right, you could save hundreds of dollars or more the next time you apply for a loan.
Want to instantly increase your credit score? Experian Boost™ helps by giving you credit for the utility and mobile phone bills you're already paying. Until now, those payments did not positively impact your score.
This service is completely free and can boost your credit scores fast by using your own positive payment history. It can also help those with poor or limited credit situations. Other services such as credit repair may cost you up to thousands and only help remove inaccuracies from your credit report.
What to Do When Your Loan Application Is Denied
You were all set to buy that new car or house. You may have even picked out the cherry-red convertible or the Cape Cod with the spacious yard — until your bank stopped you in your tracks. Your loan has been denied, and now you're not sure what to do. It's a pretty common scenario, and unfortunately, there isn't always a quick solution.
But not all hope is lost. Here are a few things you can try to secure the financing you need.
Image source: Getty Images.
1. Find out why your application was denied and correct the issues
The first step is always to understand why your loan application was turned down. This can give you some idea of what you have to do in order to get approved. Your bank should send you a letter explaining why it chose to deny your application.
You may have been denied because your credit score is too low. Perhaps you have a lot of debt that you've been struggling to pay off. Or maybe you don't always make your payments on time. These things make creditors nervous about your ability to repay the loan.
If you want to increase your chances of getting accepted, you'll have to address these problems, and that can take time.
But doing so will not only increase your chances of approval, but also help you secure better interest rates, so it's well worth the time and effort.
If you're perplexed as to why your application was denied, it's a good idea to pull your credit reports and look for anything place.
For instance, if you see an outstanding debt that you're sure you've paid off, then perhaps that creditor made a clerical error.
In that case, give the creditor a call — with proof of the payment in hand — and ask to have the account reported as paid.
You should also scan your report for accounts that you don't recognize. If you see an account that you didn't open, then you may be the victim of identity theft.
In this case, you need to alert the lender immediately, call the credit bureaus to place a fraud alert on your credit report, and file a report with your local police station.
This can take some time to sort out, but once you do, you can reapply for the loan.
Another reason your loan application may be denied is if you don't show enough income. Creditors often look at your debt-to-income ratio when deciding whether to lend to you.
If your total debt amounts to more than 30% of your income, it signifies to lenders that you may be living beyond your means.
You can correct this by paying down your debt and making sure the creditor has accurate documentation about your income.
2. Use collateral or a cosigner
If you need the money now and you can't fix the issues listed in the explanation letter quickly, then you need to find a way to minimize the risk you pose to lenders.
If you were applying for an unsecured personal loan, then you may have better luck offering something up as collateral, such as your car. That way, if you fail to pay, the bank has a way to recoup some of its money.
Because of the decreased risk of loss, the lender may be more willing to give you the loan.
Some loans, including mortgages and car loans, already have collateral — that is, the home or the vehicle they finance.
If you're denied one of these loans, then you may have to find a friend or family member who is willing to cosign with you.
Their good credit may reassure the bank that the loan will be repaid, because if you fail to pay, the lender can demand payment from the cosigner.
Before resorting to either collateral or a cosigner, you must think carefully about your decision. If you offer property as collateral and then default on your payments, then you'll lose that property and a good chunk of your credit score.
If the loan has a cosigner and you don't pay, then you're placing a huge financial burden on the cosigner — and potentially ruining a relationship in the process.
Unless you're confident that you can make the loan's monthly payments, you're better off waiting until you've improved your credit before you apply again.
3. Make a larger down payment
You may be able to increase your chances of approval simply by decreasing the amount of the loan.
When evaluating loan applications, lenders look at the loan-to-value (LTV) ratio, which measures the size of the loan compared to the value of the object you're buying.
A high LTV ratio represents a greater risk, because there's a chance that the value of the object, if sold, might not be enough to cover the total cost of the loan and provide sufficient profit to make the deal worthwhile to the lender.
Ideally, you can make a down payment of at least 20% of the total value if you're buying a home or car. Lenders usually offer the best rates to individuals who can pay at least this much upfront. Not everyone can afford this, though.
In that case, do the math and figure out how much you can reasonably put toward the down payment. Say you were denied a $20,000 loan with a $2,000 down payment.
If you can double the down payment to $4,000, you'll have much better odds of approval, because your LTV ratio will spike from 10% to 20%.
4. Apply for a loan elsewhere
All lenders weigh risk slightly differently, so just because you were denied by one doesn't mean you'll be denied by another. Of course, that all depends on why you were denied.
If your credit score is under 500, you'll probably have trouble getting a loan anywhere.
But if your credit is 680 or better and there aren't any major red flags on your credit report, then it may be worth trying another lender.
If you're going to apply elsewhere, you're better off doing it quickly. Most credit scoring models count all hard credit inquiries that happen within a 30- to 45-day period to be a single credit inquiry, which means they have less of an impact on your credit score. Waiting longer than this will put another hard inquiry on your report and can lower your score.
Getting denied a loan isn't the end of the world, but you need to understand why it was denied and then take steps to correct the problem. By following the four steps outlined above, you should be able to get the money you need without too much hassle.
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What To Do When Your Mortgage Application Gets Denied
Your mortgage application was denied. These words sound harsh, but they don’t always mean you can’t get a mortgage.
If your lender rejects your request for a loan, all may not be lost. There are a few steps you should take after getting denied to see how you can improve your chances and get a mortgage with your next application.
Find out why you were denied
When your loan application gets rejected, “it shouldn’t be a surprise,” says Brian Koss, executive vice president at the Mortgage Network Inc. “Your loan officer should have given you a good assessment.”
The mortgage application process is fairly rigorous, no matter who you’re applying with. At some point in the process, if you have one or several strikes against you, the loan officer should give you some indication that you may not qualify.
“The lender is supposed to provide you with the reasons you were denied so you can take that info to heart and use it to identify a way to resolve things, so you can get on a better financial footing and you can re-qualify later,” says Bruce McClary, senior vice president of communications for the nonprofit National Foundation for Credit Counseling.
There are a number of reasons you could be denied for a mortgage, including:
- Changes in your employment status – If you recently got a new job or were laid off, for example
- Changes to your credit or a low credit score – A number of things can affect your credit score, including opening or closing credit card accounts, making a big purchase a car or taking out a personal loan. As you approach your closing, it’s a good idea to keep the status quo with your finances to avoid these pitfalls.
- Changes to your income – For instance if you took a pay cut
- Too much debt – If you already have a lot of debt, lenders may view your debt-to-income ratio as a mark against you, and could deny your application.
Examine your credit
Your credit score plays a big role in determining what types of loans and rates you’re eligible for. Be sure to examine your credit report closely and make sure there aren’t any errors on it that might be dragging down your rating.
“Get to know your credit score and take action to ensure your credit score is strong,” says Dave Mele, president of Homes.com.
If your credit score isn’t great and a lender tells you that’s why you were turned down, don’t assume that’s the end of the road for you and a loan. You still might qualify for a loan with a different lender. For example, government-backed loans those from the Federal Housing Administration (FHA), VA or USDA tend to have lower credit limits than private mortgages do.
Banks don’t always offer every type of loan, so if you’ve been turned down by the same bank where you’ve been keeping your cash, in many cases it’s not you, it’s them.
“Seek out someone that works for a non-depository institution and works with a direct mortgage lender versus a bank,” says Corvi Urling, a loan consultant at LoanDepot. “Mortgage lenders generally carry a larger portfolio and would then have the ability to offer access to different programs that you might qualify for.”
You can also work on improving your credit. The best way to do that is to make sure you’re paying your bills on time, but it’s also a good idea to minimize how much credit you’re using by keeping little or no balance on your cards. You might also be able to take advantage of credit-boosting programs.
Pay down your debt
Even with a strong credit score, lenders also look to see how much money you owe for things credit card bills, car payments and student loans and compare this to how much money you make. This is known as your debt-to-income ratio, or DTI, and it can play a huge role in lenders determining whether you’re eligible for a new loan.
For example, if your wages are already mostly spent on existing high monthly bills, lenders won’t have the confidence that you’ll be able to make your monthly mortgage payments as well.
Most of the time, lenders want to see a DTI of less than 43 percent. If you don’t fit that profile, there are ways to overcome that number.
“One of the big things you can do is pay off some other debts,” Mele says. “A credit card is a great place to start.”
Look for help with student debt
Today’s generation of homebuyers is also far more ly to be saddled with debt from their education, but that doesn’t mean they can’t buy a home.
If your student debt is holding you back, consider an income-based repayment plan, which can reduce your monthly payments obligation. Some lenders may also have specific mortgage products just for doctors, who may have sky-high student loans but typically also have above-average salaries once employed.
You wouldn’t stop buying clothes just because the first thing you tried on didn’t fit, so don’t make that mistake with your mortgage.
“There’s a lot of folks that aren’t bad borrowers but just have credit issues,” says Raymond Eshaghian, president of GreenBox Loans.
There are mortgage loans out there for many different buyer profiles, and just because a standard 30-year loan might have been right for the couple down the street, that doesn’t mean it is for you.
“You never want to have all your eggs in one basket.
It would be horrible if you get all the way to closing and you have the moving truck out front and now you can’t move into that house,” says Urling, who recommends filling out applications with at least two or three lenders to help defray the lihood of being rejected outright. “There’s no obligation for a consumer to take a loan at any point.”
There is no mandatory waiting period after you’ve been denied, but because a mortgage application usually involves a credit check, which can lower your score, it might be a good idea to wait a bit so that it has time to smooth out.
A co-signer might also help you qualify. For example, if you’re a young buyer with sub-par credit, but your parents have stronger credit and are willing to co-sign your loan, you may be approved more easily.
Keep in mind though, getting a co-signer may make your application a little more complicated, because you’ll need to include more supporting documents.
Mortgage Application Denied? Here’s What to do Next
You finally found it — the home of your dreams. But now it’s slipping away because your mortgage loan application was denied. Amidst all of the emotions you’re feeling, it can start to feel there’s no next step.
Buying a home is an emotional process when everything goes perfectly; any missteps amplify all of those emotions, and a loan denial can feel devastating. Since the 2008 housing crash, lenders have become more cautious, lending standards are more stringent, and now even those with a high credit score are not guaranteed approval.
Why would a home loan be denied?
You can’t fix what you don’t know, so first find out why your application wasn’t approved. Lenders are required to provide a rejection letter explaining the reason behind their decision, and you can always ask the loan officer for more information. Here are a few common reasons loans are denied, and what you can do next in each situation.
Debt-to-Income Ratio (DTI) too High
Lenders are looking for financially sound investments, and having a high debt-to-income ratio increases risk. If your monthly debt payments take up a large percentage of your income, this indicates to lenders that adding another debt payment such as a mortgage is ly to make you more financially unstable.
There are a few ways to work with a denial due to DTI. First, think about the last time you opened a new line of credit. Did you recently take out a personal loan, or apply for a new credit card? That means your DTI just jumped; it’s often recommended that you not open new lines of credit during the six to 12 months prior to applying for a mortgage.
If this isn’t the case, spend some time focusing on paying off debts before reapplying for a mortgage. Consider asking for a raise or acquiring a second job, as this increase in income will lower your overall DTI. If possible, refinance and consolidate payments to lower monthly debts.
We all know your credit score is important when it comes to applying for a mortgage, and that having a low score can hinder a lot of options. While there are several steps to take to improve your score, the important one is to first evaluate why your score is what it is.
Are there marks against your score, for late or missed payments? If any of these are incorrect accusations, dispute the marks to have them removed. On the other hand, if you have a tendency to forget when monthly payments are due, set up recurring auto payments so you don’t have to sweat it.
If you haven’t established credit prior to applying for a mortgage, lenders won’t be inclined to approve you. Opt to grow your credit in other ways, such as credit cards or personal loans. Because these are in smaller amounts, you’re more ly to get approved even if you don’t have credit history.
Low Down Payment
The down payment on a home typically ranges from 5 percent to 20 percent, and works as a good faith payment to the lender that you’re serious about your investment and intend to payback any borrowed money. If you’re denied a home loan not offering enough of a down payment, the lender is worried you might default down the line.
Reassess your finances and ensure you’re offering the strongest down payment you can while staying within your financial means. If you know you cannot offer any more, research different kinds of home loans that require a lower amount than the mortgage you applied for; if it’s within the 5 to 20 percent range, you’ll find a lender.
Remember that low-risk factor we were talking about that lenders are looking for? They to see it in your employment history, too. Consistent employment at one location indicates to lenders that you’re responsible enough to hold down a job.
If employment is the reason you’ve been denied, work on establishing your job consistency while at the same time improving other factors. Taking a few years to achieve stable employment means you also have time to save up for a larger down payment to improve your DTI and credit score.
Unexplained Income or Expenses
The loan officer is going to go through everything within your finances to determine if your approval or denial. One thing that might sway them negatively? Significant income or regular expenses that aren’t documented.
This includes everything from suspicious wire transfers to a huge monetary gift from your great aunt. If there are drastic transactions in your bank account and no logical explanations, a lender might feel you’re too risky of an investment.
When reapplying, be sure to include every income-related document you have in order to answer these questions before they’re asked. If a family or friend will be paying the down payment as a gift, get a written letter from them ahead of time outlining the amount they’ll pay and making it clear that the money is a gift and is not going to be paid back.
Whether intentional or not, any pertinent information omitted from a mortgage application that is later discovered by the lender is ly to get your loan denied. Go over each section carefully when applying to ensure you’ve entered information correctly.
Additionally, be upfront with your lender about any debts or financial challenges you’re facing. If they know ahead of time, they can work with you to find a way around the problem.
Risky Moves After Pre-Approval
If you’ve taken the steps to get pre-approved for a mortgage, don’t sabotage yourself by damaging your credit after the fact. Pre-approval is contingent upon your financial situation at the time of evaluation; if you are pre-approved, open up seven lines of credit, and then apply for the loan you’ve been pre-approved for, you’ll ly be denied.
If this is the case, wait out the time frame and focus on getting the rest of your finances in order before reapplying for any mortgage loans.
Low Home Appraisal
Sometimes the denial has nothing to do with you. If the home you’re looking to purchase comes back with an appraisal that is significantly lower than the loan you’re applying for, a lender will deny you because, you guessed it, it’s too high a risk.
If this is the case, you’ll need to negotiate a lower sales price from the seller or opt to pay the difference between the appraisal and the loan pocket.
Before Applying for a Mortgage
Want to avoid a denial letter? The best way to is to preemptively prepare before you even begin applying for a home loan. The basics steps for success are:
1. Know Your Credit Score
Request credit reports from all three major credit bureaus, since the information can vary. Work on correcting any inaccuracies or discrepancies between credit reports.
2. Manage Your Debt
If you know you have a high DTI or credit utilization ratio, take time to consolidate payments and credit cards. Be careful not to close all of your cards in an attempt to get your credit score to skyrocket: Having long-term lines of credit is going to make lenders feel much more comfortable than someone who suddenly pays off all of their loans and closes all their accounts.
3. Manage Your Expectations
Don’t set yourself up for failure: Be realistic about how much home you can afford. If you’re working with a modest budget, a custom McMansion isn’t in your future, and any loan applications for outrageous amounts will be denied.
A mortgage loan denial is definitely an obstacle, but it doesn’t have to derail or stop your entire home search process. Take time to evaluate your situation and make conscious steps to improve so when you reapply, you’re a stronger candidate.
Do you have other questions about the home searching, purchasing, or building process? Drop them in the comments below, or head over to NewHomeSource’s Learn Center for more resources.
Mia Zozobrado joined Builders Digital Experience (BDX) in 2019 as a content writer. A graduate of Southwestern University with a degree in English, Mia is passionate about the written word and making connections. Outside of work, Mia also serves on the Board of Directors for the Writers’ League of Texas.