What to do if your loan or mortgage application is rejected

Applying for a loan or mortgage can feel like a big step. You have a goal in mind, and you have to share a lot of personal information with someone (the lender) to decide if you are a worthy candidate. It can feel like a big blow if your loan or mortgage is rejected. What should you do if this happens?

The first thing to do is to ask the lender why your application was declined.

While the lender is not obliged to give you a reason, they should give you the name and address of the credit reference agency they used.

You might have a poor credit history or have exceeded your credit limit on loans or credit cards, which can impact your credit score.

Why Have I Been Declined A Loan?

There are many reasons why your loan application might have been declined.

It might be that you don’t pass the lender's credit score, have adverse credit registered against you, or that your income is insufficient to afford the proposed monthly repayments.

Most lenders use a debt-to-income ratio to determine whether you can afford additional borrowing. You can improve your debt-to-income ratio by reducing your current debts or increasing your income.

Alternatively, if you are applying for a second mortgage, you may need more equity in your property to meet the lender's underwriting criteria, or your property may not be considered suitable security.

All lenders will check your eligibility and check your financial situation.

Should I Talk To My Loan Provider?

You can approach the lender to ask them why you had a declined application. While they are only obliged to provide the name and address of the credit reference agency they used, they may be more helpful and give you an indication as to why they have declined the application. Perhaps your credit score wasn’t high enough, or you hadn’t lived at your property long enough.

Occasionally, there may be situations where there has been a misunderstanding in the application process. By speaking directly to the lender, you might be able to explain that you made an error or didn’t fully understand a question that you were asked.

Talking to the lender can clear up misunderstandings, and you can provide additional backup documentation if needed.

Communicating with a lender demonstrates your desire to resolve any issues and starts building a relationship with them, which could be helpful with your current or future applications.

How Long Should I Wait Before Applying Again?

How long you should wait before re-applying for a loan or mortgage depends on the reason you were declined.

If you have been declined for a personal or unsecured loan because you have not lived at your current address for a year or more, it would be worth reapplying once you’ve lived there for 12 months. Likewise, if you’ve only been in your current job for three months, a lender might be happy to consider your application once you’ve been there for six months.

It’s best not to apply to several lenders if one lender has declined you, as this suggests you might be desperate for a loan, which could send warning signals to lenders.

It’s difficult to be exact, but a few months where all credit card and loan repayments are met should improve your creditworthiness and improve your chances when you apply for a mortgage.

Will A Declined Application Affect Your Credit Score?

When you apply to a lender for finance, they will conduct an eligibility check, which will include examining any bad credit history.

While being turned down for a loan does not directly affect your credit score, the “hard” credit search related to the application may have a minor effect.

Your credit history, the length of the credit history, the credit utilization, and the number of searches carried out determine your credit score.

It’s good to understand how your credit score works. You can apply to any of the three leading credit reference agencies, TransUnion, Experian, and Equifax, which will provide you with a copy of your credit report for a small fee. This report will not harm your credit score and allows you to check your credit reports.

If you were to have a mortgage declined, getting a credit score check would be a good idea. You might have bad credit or no credit history, meaning no loan provider can help you. In this situation, you should look to improve your credit score and look at mortgage alternatives.

If you have a poor credit rating or have exceeded the limits on your credit accounts, this will damage your credit score, and it may result in you being offered high interest rates on any loan.

What Loan Alternatives Are There?

There are several loan types to consider when raising finance.

If you are looking for a small loan of, say, £2,000 - £5,000, it could be worth considering an unsecured or personal loan. While the interest rates are generally higher than second mortgages, you are not offering your home as security, and the fees associated with arranging the loan are usually lower.

One restriction with personal loans is that the loan term is typically restricted to a maximum of five or seven years. This short term means that monthly payments can be high.

With a second mortgage, you can borrow over a term of 25 years or more, making repayments more manageable; however, you need to remember you are offering your home as security, meaning that if you do not keep up repayments, you could have your home repossessed.

The average loan amount for a second mortgage is just under £50,000. The most popular reason people take out second mortgages is to consolidate their current credit commitments by taking out one loan and paying off all the credit. This usually results in them having a single lower monthly repayment. The downside is that if the money is borrowed over a long period, say twenty-five years, there is a strong likelihood that they will be repaying a lot of interest.

For more information about secured loans and mortgages, contact the expert team at The Second Mortgage Company today.