Rejection of your loan application can feel like a personal rejection. After all, they’re refusing to fund your dream home, the purchase of the car you wanted, or the capital you need to start your new business. However, rejections don’t have to be final. Let’s learn a few ways you can improve your odds of qualifying for a loan.
Clean Up Your Credit
We’re not advising you to challenge accurate entries on your credit report to get a temporary boost for your credit score. Create a list of your regular bills. Identify which are current and which are behind. Get current, if you’re behind on anything. Missing payments on a little debt will hurt your creditworthiness in the eyes of creditors. Look at the payments you’re paying. Are there any additional fees you can cancel so you have more money to put towards debt?
For example, you could cancel credit card life insurance and send those extra few dollars toward the debt itself. Then you’ll reduce your credit card balance, and that improves your debt to income ratio. Canceling mortgage life insurance allows you to put another 50 dollars a month toward little debts you could wipe out in a few months. Close those little accounts, and you won’t hurt your credit score but you’ll eliminate the bills you might miss. Or pay off traffic tickets, library fines and other debts you saw on your credit report.
Pay Attention to the Little Things
Your credit application could be rejected due to any one of a number of mistakes. Putting a nickname instead of your legal name might cause it to be rejected. Not filling in mandatory fields like your address, phone number or personally identifiable information will cause the application to be rejected. If you put information in the wrong field, they may reject it.
Read the terms and conditions. Credit cards really don’t charge an application fee, but they may have an annual fee. Fail to pay that, and your credit has a ding against it. Don’t provide all of the documentation the lender requires such as a pay stub or tax return in the case of a mortgage application, and they’ll reject the application.
Work with the Right Type of Lender
Lenders often specialize in a few, specific products. For example, the big banks rarely want to issue 5,000 dollar loans to startups. That’s why angel investors and business incubators exist. Mainstream investors don’t want that level of risk. Institutional lenders rarely want to deal with non-standard loan requests, either. For example, they’ll generally loan money for a house in the suburbs or condo in the city. They’re reluctant to lend money to someone to buy a commercial building with a residence above it, a trailer, or land that you only hope to build a house on. This is why you may need to find a lender that specializes in land purchases, agricultural properties or vacation homes.
There are also times you need to work with a lender who will help someone in your demographic. If you are recovering from difficult times, you may need to seek out a bad credit installment loan, because institutional lenders consider you too great of a risk. Check their credit limits and other requirements before you apply. Don’t apply if you don’t qualify.
Manual underwriting refers to the process of having someone do an in-depth analysis of your case. They aren’t just pulling your credit score and rejecting you if it is too low. They may charge more in loan application or closing fees, but you’re more likely to be approved. They’re often the best choice for the self-employed or commissioned salespeople who have irregular income.
Reduce the Lender’s Risk
Lenders will base the interest rate on the risk they’re taking when they issue the loan. A simple strategy to reduce their risk and increase your odds of approval is to lessen their risk in the transaction. Put more money down on that car or house. Prove you’ve invested money in the business before you ask them for a loan. Don’t buy something that stretches your budget.
You could reduce your risk profile by having a cosigner for the loan. However, you run the risk of having the property repossessed or foreclosed on if the other person can’t pay the payments.
Another option is reducing the risk the lender associated with the project. Look for a more conventional home, because that unusual landmark isn’t going to be easy for them to sell if you can’t make the payments. Borrow part of the money from friends and family instead of 100 percent from the lender. Provide a detailed business plan instead of a diagram on the back of a napkin.
Be Honest with Yourself and the Lender
You must be completely honest on a loan application. It is actually more important than being completely transparent on a resume. You can leave off your master’s degree when applying for a job so that you’re not rejected as over-qualified. Leave debts or other obligations off your loan application, and you’ll be rejected and often blacklisted once they find out. Inflate your income to include side jobs or merely the income you hope to get with bonuses, and they’ll reject the application. However, you may have a legitimate issue with the classification of income. Some lenders will accept child support payments, disability payments and welfare payments as an income source. Others only want to see pension payouts and income from a day job as income to determine your ability to make the loan payments.
Don’t fall for the temptation to use a family member’s information to apply for a loan. That is identity theft, and it is criminal.
Lenders associate instability with risk. Job-hopping every few months could make them afraid to offer a car or home loan. Furthermore, you wouldn’t be eligible for a payday loan until you’ve had more than one pay cycle. Churning of your credit cards as you open accounts, chasing low teaser interest rates, is another red flag. Stop trying to juggle credit card balances, get on a financial diet, and start paying down the debt. Moving periodically can be a red flag, as well, since they don’t know if they’ll be able to chase you down for any past-due amount.