It can be a painful experience when a lender rejects your loan application—whether it’s for a mortgage, student loan or personal loan. Although you might not know what to do, you can take steps to increase your approval odds for future applications. We will walk you through what you need to do after rejection and how you can secure financing after you’ve had a loan denied.
Here are three immediate steps you can take after a rejection.
1. Identify Why Your Loan Was Denied
Before you re-apply for a loan, take time to identify why your lender denied your application. It might be because you didn’t meet the lender’s debt-to-income (DTI) ratio and minimum credit score requirements, have negative items listed on your credit report or applied for too much money. If you can’t determine the reason on your own, contact the lender.
Under the Equal Credit Opportunity Act, you have the right to ask your lender why it rejected your application, as long as you ask within 60 days. After you request an explanation, the lender must provide you with a specific reason for your denial. You can use the information it gives you to help fix any issues.
2. Remove Errors or Negative Remarks From Your Credit Report
After you identify the reason for your denial, review your credit report. Due to the pandemic, you can get a free copy of your report—from all three credit bureaus: Experian, Equifax and TransUnion—each week until April 20, 2022, through AnnualCreditReport.com; prior to the pandemic, you could only receive one free report per bureau, per year.
If you have negative marks, such as late or delinquent accounts, this can hurt your loan eligibility. While you look over your credit report, confirm each account it lists belongs to you and is accurate.
You have a right to dispute inaccurate information shown on your credit report with all three credit bureaus. Although you can pay a credit repair company to dispute the negative items for you, you can do it yourself, too. There is no charge to dispute incomplete or inaccurate information. The Federal Trade Commission (FTC) provides sample letters for disputing errors on your credit report.
3. Improve Other Key Qualification Factors
In addition to removing errors or negative remarks from your credit report, you should consider improving two other key factors lenders consider when they review your application: your credit score and DTI.
Low credit scores can lead to loan application denials. Lenders use this score to assess how much risk you pose as a borrower. FICO is a common scoring model lenders use,, with scores ranging from 300 to 850. Applicants with good credit scores (at least 670) typically experience higher approval rates; applicants with lower scores may not qualify.
Lenders may also deny your loan application if your DTI ratio is too high. They look at this number to assess your ability to repay the new loan while handling your current debt load. Lenders typically prefer ratios of 36% or less; however, some may approve highly qualified applicants with a ratio up to 50%.
To calculate your DTI, the lender divides your current monthly debt burden by your monthly gross income. For example, if your current monthly debt load is $3,000 and your monthly gross income is $4,000, your DTI ratio would be 75% ($3000 / $4,000).
Short-term Strategies to Increase Approval Odds
Try these four short-term tactics to increase your approval odds if a lender denies your loan application.
1. Prequalify With Other Lenders
Since different lenders have different lending requirements, try prequalifying with other lenders. When you prequalify, the lender should outline what terms you will receive if your application is successful, including your loan amount and interest rate; there’s no impact on your credit score because lenders typically only run a soft credit check.
If you are unable to prequalify with a traditional bank or online lender, try submitting an application through a local credit union. These member-owned, not-for-profit institutions might be more willing to extend you a loan based on your complete financial picture, and not just your credit score.
2. Provide Collateral
Providing collateral—something of value that secures the loan—might improve your chances of qualifying for a loan; a loan that uses collateral is considered a secured loan. Some common examples of collateral include a cash deposit, car title or savings account. Since the lender can seize your collateral if you don’t repay your loan, it may be more willing to approve your loan.
3. Request a Lower Loan Amount
Some lenders might deny your loan because you’ve requested to borrow more money than you can afford to repay. If this is the case, ask the lender to approve you for a lower loan amount.
4. Increase Your Down Payment Amount
Another way to increase your approval odds is to use a larger down payment amount, which makes the loan less risky for the lender to take on. For example, if you’re applying for a mortgage, you might increase your chances of approval if you put down 20% of the home’s price instead of 10%. In addition, the lender might not require that you pay for mortgage insurance.
Long-term Strategies to Increase Approval Odds
If you don’t need cash immediately and want to decrease your chances of having a loan rejected in the distant future, consider these four strategies.
1. Build or Improve Credit
Although it might take some time, taking steps to build or improve your credit will help you meet lenders’ minimum credit score requirements. To do so, repay any current debts you may have on time, keep your credit utilization rate below 30% and remove any inaccurate information from your credit report.
2. Increase Income
While increasing your income is easier said than done, it may help you qualify for more loans. More income can result in a lower DTI ratio, which means you’re more likely to meet lenders’ minimum DTI requirement. To increase your income, consider picking up a lucrative side hustle or learn an in-demand skill to boost your earning potential.
3. Pay Down Debt
You can also improve your DTI if you pay down debt. Two of the most popular debt payoff methods are the debt snowball and debt avalanche methods. With the debt snowball method, you pay off your smallest debt first, while making minimum monthly payments toward the rest of your debt. The avalanche method is similar, but instead of paying your smallest debt off first, you pay your debt with the highest interest rate.
4. Increase Your Cash Reserves
Some lenders may require you to have a certain amount of cash reserves before approving your loan. To improve your chances of qualifying for a loan that has this requirement, create a long-term automatic savings plan to increase your cash reserves.
What Happens If My Loan Is Denied a Second Time?
If your loan is denied a second time, you’ll have to identify why it happened again. Ask the lender for an explanation why it denied you a loan.
Before you apply for another loan, review your credit report again to see if you can spot any errors. Check your credit score to see if it has improved. To increase your chances of approval, you might have to wait until you meet the lender’s requirements or choose another lender that better matches your financial situation.
Other Methods of Financing to Consider
If you don’t qualify for a loan, consider these other methods of financing.
Secured Credit Cards
A secured credit card requires a refundable security deposit when you apply, which serves as your credit limit. Like a traditional credit card, you borrow money on an as-needed basis. If you fail to repay your balance, however, the lender can seize your security deposit. This option could help you build your credit, making it easier to qualify for future loans.
Grants and Scholarships
If you need help financing your business, look for grant programs in your area. Check to see if your business is eligible for forgivable loans under the Paycheck Protection Program (PPP). Also, check with your local government to see if it has a small business grant fund.
If you need money for school but don’t qualify for a student loan, consider applying for grants and scholarships.
If you can find someone in your family who can loan you money, you can bypass traditional lending requirements. The loan agreement between you and the family member could be informal but should outline the terms. However, the downside to this option is that it could ruin your relationship with the family member if you can’t repay the loan.