A rejected loan application can feel like a slap in the face. This is particularly true when you don’t see the rejection coming.
But each year, many Americans face this demoralizing dilemma without understanding why. In the following article, we’ll be shedding light on what can go wrong and what to do about it. Let’s begin!
- Bad Credit
Of course, lenders aren’t going to give you prime rates with poor credit. But many won’t approve the loan at all, and that can lead borrowers into higher interest rates and snowballing debt.
It’s important to know what causes bad credit if you’re in this situation. The main drivers include credit reporting errors, failure to pay bills on deadline, and having bankruptcies or debts sent to collection.
If you want any type of loan approval, you’ll settle these issues as soon as you can. But even then, it takes time and responsible financial behavior to elevate your scores.
Check your credit regularly to keep up with the stumbling blocks. From there, devise a plan to tackle each one. Each reconciliation brings your score closer to where it needs to be.
And just where is that? According to Experian, one of three official reporting agencies, a good score runs from 670-739, very good 740-799, and exceptional 800-850. The median credit score of mortgagees is 758.
- No Credit
Loan rejection isn’t confined to bad credit scores. It also can happen to people who’ve never worked to build their credit.
Unfortunately, lenders operate from a “guilty until proven innocent” standpoint when dealing with borrowers. It’s not that they won’t lend. It’s just that they won’t lend much.
Home mortgages, for instance, are hard to come by if you’ve avoided any type of credit-building activity. Lenders are nervous about doling out hundreds of thousands of dollars if they’ve never seen how responsible you are with other people’s money.
You want to use credit even if it makes you uncomfortable. If that’s the case, start with a secured credit card that requires you to frontload before you’re able to use it.
Otherwise, only make purchases you’d pay for with cash anyway. That makes it easy to pay off at the end of the month and avoid interest charges. Before you know it, your credit score will be climbing the scale.
- High DTI
Debt-to-income ratio (or DTI) is a concept you’ll need to become familiar with if you want to know how to apply for a loan successfully. DTI can lead to rejection even if you have a good credit score. How that happens:
A lender won’t approve a mortgage if your DTI (the amount of debt relative to how much money you make) is higher than 40 percent. You earn $10,000 a month. Your monthly debts total $4,500.
Divide the monthly debt by your income. You’ll get 45 percent. That’s five higher than their maximum allowable amount.
This matters to the lender because of two reasons. One, you’ll have less “wiggle room” to make your bills each month. And two, that puts you one medical emergency or house repair away from falling into default.
- Too Much Credit Use
Lenders look at two things when determining if you’re using too much credit. They are:
- Actual utilization of credit: it’s mostly up to the lender, but 30 percent seems to be the “sweet spot” maximum for credit utilization. In other words, if you have access to a $30,000 credit limit across four cards and the combined total is $12,000, then you’re about 10 percent too high.
- Credit application behaviors: multiple accounts hurting your credit score is a misconception. But opening those accounts over a short period of time can signal to the lender that you’re up to some risky credit business.
When using credit, focus on a single account at a time. Make sure you’re always paying on time and that you’re not exceeding the 30 percent rule.
- Job Situation
Unemployment or an unstable work history naturally will give lenders a reason to say no. After all, they need some assurance you’ll be capable of paying back the loan before committing to you financially. Irregular income is why freelancers and entrepreneurs can struggle on the lending scene.
- Incomplete or Inaccurate Applications
Loan applications can be quite complicated. If you’re uncertain on some of the information they’re asking for, it can lead to incomplete or inaccurate entry. This can automatically trigger rejection.
- Jurisdiction and Citizenship
Where you are applying for the loan can lead to rejection if the lender doesn’t serve your area. This wasn’t so much of a problem in the pre-online application days, but the Internet has changed that.
Citizenship is another factor. Permanent resident aliens and other non-US citizens may run into issues getting approval. In those instances, it’s a good idea to meet with a licensed financial advisor about your options.
So you’ve gotten your rejection letter. Now what?
Don’t spend too much time feeling sorry for yourself. Figure out what went wrong. The lender will usually tell you.
If that information isn’t forthcoming, seek it out. It’s the only way you’ll be able to fix any mistakes on your credit report or eliminate the blips that are causing you the most drama. Quick action steps include:
- Paying off the lowest amount and snowballing the money you used for those payments onto the next outstanding debt
- Using collateral, or any valuable assets you may own, as a “promise” to repay the loan if you miss payments
- Getting a co-signer who trusts you enough to share the responsibility for repayment
- Increasing your earnings by getting a better job, a second job, or taking side gigs
Also, if you have a credit card that shares your credit score for free each month, make sure you’re checking it every 30 days. Finally, reapply once you see some improvements.
There Is Life After Your Loan Application Is Rejected
Rejection may “smart” for a while but it’s not the end of your financial road. Use what’s wrong to build a plan. Then, stick to it.
And for more advice, on categories from insurance to personal finance make sure to browse the rest of our website. Good luck with your next loan application.