Editorial note: We earn commission from partner links on Forbes Advisor. Panels do not influence editors’ opinions or ratings.
It can be a traumatic experience when a lender rejects your loan application – whether it’s for a mortgage, student loan, or personal loan. Although you may not know what to do, you can take steps to increase your odds of being approved for future applications. We will guide you on what you need to do after rejection and how you can secure financing after a loan rejection.
Here are three immediate steps you can take after rejection.
1. Determine the reason for your loan rejection
Before you reapply for a loan, take time to determine why the lender rejected your application. This could be because your lender’s debt-to-income ratio (DTI) and minimum credit score requirements are not met, you have negative items listed on your credit report or you apply for a lot of money. If you cannot determine the cause yourself, contact the lender.
Under the Equal Credit Opportunity Act, you have the right to ask your lender why it denied your application, as long as you request it within 60 days. After you ask for clarification, the lender must give you a specific reason for your refusal. You can use the information it gives you to help fix any problems.
2. Remove errors or negative notes from your credit report
After determining the reason for the denial, review your credit report. Because of the pandemic, you can get a free copy of your report — from all three credit bureaus: Experian, Equifax, and TransUnion — every week until April 20, 2022, through AnnualCreditReport.com; Before the pandemic, you could receive only one free report per office per year.
If you have negative signs, such as overdue or overdue accounts, this may affect your eligibility for the loan. As you review your credit report, make sure that each account it lists belongs to you and is accurate.
You have the right to contest inaccurate information described 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 as well. There is no fee to object to incomplete or inaccurate information. The Federal Trade Commission (FTC) offers letter samples to challenge errors in your credit report.
3. Improve other key qualification factors
In addition to removing errors or negative notes from your credit report, you should consider improving two other key factors that lenders consider when reviewing your application: your credit score and DTI.
Low credit scores can lead to a loan application being rejected. Lenders use this score to assess how much risk you pose as a borrower. FICO is a common scoring form used by lenders, with scores ranging from 300 to 850. Applicants with good credit scores (at least 670) usually experience higher approval rates; Applicants with lower scores may not qualify.
Debt to Income Ratio
Lenders may also reject your loan application if your DTI ratio is too high. They look at this number to assess your ability to pay off the new loan while dealing with your existing debt burden. Lenders usually prefer rates of 36% or less; However, some may approve highly qualified applicants by as much as 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 burden is $3,000 and your total monthly income is $4,000, your DTI would be 75% ($3,000 / $4,000).
Short-term strategies to increase the odds of approval
Try these four short-term methods to increase your odds of approval if a lender rejects your loan application.
1. Pre-qualification with other lenders
Since different lenders have different lending requirements, try prequalifying with other lenders. When you pre-qualify, the lender must specify the terms you will receive if your application is successful, including the loan amount and the interest rate; There is no effect on your credit score because lenders usually only perform a soft credit check.
If you are unable to pre-qualify with a traditional bank or online lender, try applying through a local credit union. These member-owned, non-profit organizations may be more willing to extend a loan to you based on your complete financial picture, not just your credit score.
2. Providing guarantees
Providing collateral—something of value that secures the loan—may 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, a car title deed, or a savings account. Since the lender can seize your collateral if you don’t pay off your loan, they may be more willing to approve your loan.
3. Ask for a lower loan amount
Some lenders may reject your loan because you asked to borrow more money than you can pay back. If this is the case, ask the lender to agree to a lower loan amount.
4. Increase down payment amount
Another way to increase your odds of approval is to use a larger down payment amount, which makes the loan less risky for the lender. For example, if you are applying for a mortgage, you can increase your chances of being approved if you reduce 20% of the home price instead of 10%. Additionally, the lender may not require that you pay for mortgage insurance.
Long-term strategies to increase the odds of approval
If you don’t need cash right away and want to reduce your chances of being refused a loan in the distant future, consider these four strategies.
1. Building or improving credit
Although it may take some time, taking steps to build or improve your credit will help you meet the minimum credit score requirements of lenders. To do this, pay off any existing 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 are more likely to meet the minimum DTI requirements for lenders. To increase your income, consider acquiring a profitable side business or learning a skill that is needed to increase your earning potential.
3. Pay off debts
You can also improve your DTI if you pay off debt. Two of the most popular debt repayment methods are the debt snowball method and the debt breakdown method. With the debt snowball method, you can pay off the smallest debt first, with minimum monthly payments towards the rest of your debt. The avalanche method is similar, but instead of paying off your small debt first, you pay off your debt at the highest interest rate.
4. Increase your cash reserves
Some lenders may require you to have a certain amount of cash reserves before your loan is approved. To improve your chances of qualifying for a loan that has this requirement, create an automatic long-term savings plan to increase your cash reserves.
What happens if my loan is rejected for the second time?
If your loan is refused a second time, you will have to determine why it happened again. Ask the lender for an explanation of why you were denied a loan.
Before applying for another loan, check 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 getting approved, you may have to wait until you meet the requirements of a lender or choose another lender that better suits your financial situation.
Other funding avenues to consider
If you do not qualify for a loan, consider these other financing methods.
Secured credit cards
A secured credit card requires a security deposit that is refundable upon application submission, which acts as a line of credit for you. Like a traditional credit card, you borrow money on an as-needed basis. However, if you fail to pay your balance, the lender can forfeit your security deposit. This option can help you build your credit, making it easier to qualify for future loans.
Grants and Scholarships
If you need help funding your business, search for grant programs in your area. Check to see if your business qualifies for cancelable loans under the Paycheck Protection Program (PPP). Also check with your local government to see if they have a small business grant fund.
If you need the 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 lend you cash, you can bypass the traditional lending requirements. The loan agreement between you and the family member can be informal but you should specify the terms. However, the downside of this option is that it may spoil your relationship with a family member if you are unable to repay the loan.