It’s extremely disappointing to be denied a loan, and it happens to hundreds of people every day for a variety of reasons. Sometimes it’s their fault. Other times, the lender makes a decision that is hard to understand.
Be sure to ask your creditor why you were rejected. Under the Equal Credit Opportunity Act , the creditor must tell you why you were denied, though it doesn’t have to tell you the factors and points used in its scoring system. Lenders are required to send you a free copy of the credit report used to arrive at the decision.
The most common problem is a bad credit report
A lender will pull your credit report, which is what is typically used to assess the kind of risk you pose. Various credit problems, such as a history of late payments, defaults on other loans, high credit card debt or a recent bankruptcy, can ruin your chances of being approved.
If you have a lot of negative information on your credit report and you’re applying for a mortgage, you’re probably going to have difficulties. You’re better off taking six months to fix the problems before applying again. You don’t want to keep applying once you’ve been denied without fixed your credit report, because each application triggers an inquiry, which is then included in your credit report and drags down your credit score.
How to fix your credit problems
Get a copy of your credit report and try to correct any errors or negative information on there by contacting your creditors. If you have a habit of paying late, you’ll need to show you can manage your credit responsibility for six months to a year before applying again. If you have high debt, you need to pay it down as quickly as possible.
Here are some other reasons your loan application might be rejected:
You have inconsistencies with your information. If a lender finds inconsistencies between the information you gave him on your application and what he’s discovered doing his own verification, it could be grounds for rejection. For instance, you put your income as $50,000 but when he calls your company to verify, they say you make $40,000. That’s going to raise some concerns. You have to be straight with the lender. Don’t make anything up and answer questions honestly.
You have been employed less than two years. Lenders want to know you have a stable income. They like to see you have a job for at least two years when you apply for a loan. Try not to make any drastic moves (like quitting your job or changing careers) before turning in your application.
You have lost your job. If you lose your job right before you close on a home loan, that’s grounds for instant denial of your application, unless your spouse earns enough to support the mortgage payments on his or her own. Try to get a new job in the same field with a similar salary before you apply again, or you may be subjected to the two-year employment rule.
You have recently added new debt. Don’t buy a new car or other large-ticket item before you apply for a loan or after you’ve turned in your application. Lenders don’t like to see your financial picture change during the loan process. If you make a purchase that will severely alter your debt-to-income ratio, you could be rejected.
You refuse to provide new documentation. If a lender asks for more information, be sure to provide it. If your file is incomplete, your loan could be denied. However, if they keep asking you for the same information over and over, it could be a scam. Be sure to keep copies of all the documents you’ve shared and send everything by registered or certified mail so you have a paper trail of everything that you’ve sent.
You have experienced racial discrimination. It is illegal for lenders to discriminate against you based on race, gender or age. If you feel you’ve been discriminated against, contact the Consumer Financial Protection Bureau , or specifically for mortgages, contact the Department of Housing and Urban Development . Also call your state’s fair housing department and your local municipality officials to report your concerns.
What to do if you’ve been turned down for a loan
If you’ve been turned down for a loan, don’t be discouraged. Not all loan officers are created equal. Some lenders are willing to work with people with credit problems. If at all possible, talk to your own bank first. If you have a bad history with that bank, try another lender. Also contact a credit union, the human resources department at your job, and friends and family to find out where they got their loans.