Whether your request for a new credit card, auto loan, mortgage loan or business line of credit was denied, it is easy to see it as a personal failure. However, there are a number of reasons why your loan application may have been denied. Furthermore, some of these reasons can be addressed. That means your next loan application is less likely to be denied. Let’s look at the most likely reasons your credit request was denied. Then we’ll share tips on how to avoid these mistakes or address the issue so that you’re approved next time.
You’re Over-Exercising Your Credit
Creditors see a surge in activity on your credit report as a red flag. If you’ve opened up several store accounts in the same weekend, the next one may be denied because they’re afraid it is a sign your identity has been stolen. Repeated applications for online loans could be denied for the same reason. If you’ve applied for a car loan, furniture store card and other loans while your mortgage application is being reviewed, this could stall your mortgage application because they’re concerned, you’re not going to be able to afford the house payment, too.
The solution is to stop exercising your credit. Don’t open accounts as if they’re nothing, because that isn’t true. And don’t open any new lines of credit when you’re trying to get approved for a major loan such as a mortgage or business loan.
You Made Mistakes on the Application
This is a surprisingly common reason loan requests are denied even when you have good credit. Writing down the wrong address or personally identifiable information will cause applications to be rejected, because they aren’t certain that you’re really you. Failing to fill in mandatory fields will get your loan request denied, too.
You Failed to Provide Documentation
Creditors want to know that you’re able to pay the loan. Saying you’ve worked for the same employer for six months may not be good enough. Fail to provide proof of employment or income, and the application may be rejected. Others want to see residence stability. Can they mail you the bill in confidence that you’ll receive it? If you don’t provide proof that you live at the given address, they may be reluctant to extend credit. Provide proof that shows you live somewhere else, and this raises a major red flag. The self-employed and business owners always have to provide more extensive documentation to prove their income than someone who can simply make a copy of their last pay stub.
Your Debt to Income Ratio Is Too High
The debt to income ratio is basic tool for determining whether or not you can pay off the debt. Creditors have a rough idea of how much money it takes to live off of, and the rest is available for discretionary spending or debt repayment. If your debt to income ratio is too high, they will refuse the loan. Do not make the mistake of overstating your income. They’ll reject the application because you provided false information.
One solution is to hunker down and pay off some of your debts. Another is to refinance your debts so that you have a lower monthly payment. This may allow you to qualify for another, modest monthly payment. Taking a second job allows you to pay down your debt, though that extra income shouldn’t really be used to argue that you can pay a new payment. However, getting a better paying job will allow you to afford additional payments.
Be careful about closing old credit accounts. Creditors like to see a utilization rate of around 30 percent. Close a bunch of accounts, and your debt utilization ratio may rise to a point where creditors don’t like it.
The Creditor Doesn’t Extend Credit in That Situation
This type of rejection isn’t personal. Most mortgage lenders want to loan money for properties that are easy to resell if they have to foreclose on the property. Unusual properties and those that have low demand are simply not going to be approved. This is why a big bank is likely to reject a loan request for a rural or agricultural property. Unusual homes that don’t fit the âcondo in the city, single family home in the suburb’s ideal will be rejected, as well. This can rule out a hybrid commercial-retail property in many cases. You see ads for vacation loans and wedding loans because most lenders will refuse the application if that’s put down as the reason for the loan.
There is also the fact that some creditors will not extend credit to those considered a credit risk. Prior bankruptcies, foreclosures and late payments may be in the past, but mainstream creditors may not want to take the risk. The solution is to look for lenders who offer installment loans for bad credit customers. They may do more detailed review of each case to weed out the true credit risks, so they can offer a more reasonable interest rate to those who are recovering from their financial mistakes.
You Look Like a Credit Risk
Creditors regularly reject applications when you appear to be a credit risk. And this may not be due to a low credit score or recent bankruptcy. Several recent late payments may prevent your loan application from being approved. Any debt going to collections could cause rejection, too. And it may be because you forgot about a store credit card or medical bill. An identity thief running up debt in your name could cause you to be rejected for a loan, though it is not your fault.
Your initial loan application may be rejected if you don’t have a credit history. This is a common problem for new graduates. You can reduce the creditor’s perceived risk by having someone with established credit co-sign the loan.
Creditors are reluctant to finance anything 100 percent. The more equity you have in the item you’re buying, the lower their risk of losing money if they have to repossess it. This is why you’re more likely to be approved for a car or house loan if you put 20 percent down than 10 percent down. And increasing your down payment will improve the odds you’re offered a low interest rate, regardless of your credit.