What should you do if the lender rejects your application?
Has your loan application been declined? Have you made an entire business plan around this short-term mortgage, and the answer is, “Sorry, not this time!” Do not worry; sit back and relax. You are not alone in this situation, and many applicants face rejection of loan applications. If your application is rejected, keep pursuing your goals. Figure out the problem before applying for alternative funding.
1. Understand why the lender rejected your application
The first step is to find out why this application was unsuccessful. Unfortunately, the lender rejected your loan application, but it is important to look into the details and make sure your assumptions are correct. That way, whenever that happens, your next application may have a better chance of success. Applying for a loan too often can result in all applications getting rejected and hurting your credit score.
Here are some reasons why lenders decline 1st mortgage or business loan applications:
Low credit score
Bad credit will adversely affect your application for a business loan. The lending institute will immediately decline the loan application. A credit score is a number that you must maintain to avail of business loans at low-interest rates. Checking your credit score and obtaining a credit report is mandatory for traditional lending options, however private lenders do not have this criteria.
Incomplete application or documents
In addition to the loan application, the applicant must submit loan documents specified by the lender. You must submit all requested documents with the necessary details to complete your application. You should not submit incomplete, lost, false, forged, or counterfeit documents to any financial institution. It can lead to rejection.
Lack of effective business planning
Every borrower should be aware of the type of business loan for which they are applying. To be successful, you should prepare a specific, self-designed business plan and present it properly during your loan application. Traditional Banks hesitate to lend to business owners and entrepreneurs without a business plan and adequate business information. Whilst banks have this criteria again private lenders have much less requirements.
Inadequate cash flow or collateral
A company’s cash flow is the primary source of information lenders use to assess the ability to repay the loan. Insufficient cash flow can cause banks to lose confidence in you, leading to 2nd mortgage loan declines. Maintain proper cash flow by arranging bills and eliminating extra charges.
Second, not all banks offer unsecured loans. For startups, business owners, and corporations wishing to apply for secured business loans or secured loans, it is mandatory to provide sufficient collateral required to get the loan amount. Again, insufficient collateral by the applicant will result in the refusal of the loan. You can submit collateral, including residential or commercial real estate.
Credit Beginner Startups or Applicants
A “New Credit” is a customer with no current or previous credit use and does not have or maintain a credit score. These clients who want to start their businesses need help getting loan approvals or having a loan declined, as banks classify them as high-risk applicants. Therefore, a “credit newbie” or startup applicant who is not very familiar with the banking industry should first start using basic credit products such as credit cards. When using a credit card, the Customer should not maintain a high credit utilization rate above 30% of the total approved limit. After building a satisfactory credit score, a traditional bank may then look at an application, however private lenders are also an alternative for a short-term mortgage.
2. Remove errors and negative comments from your credit report
After identifying the reason for rejecting the 1st mortgage application, check your credit report. Report copies are available free of charge from all three credit bureaus. Negative grades can affect your creditworthiness. When reviewing your credit report, ensure each account listed is yours and is accurate.
You can appeal any inaccuracies in your credit report to one of the three credit bureaus. You can pay any credit repair company to pinpoint the bad points or do it yourself. You are free to object to any incomplete or inaccurate information.
3. Other important eligibility improvements
In addition to removing errors and negative comments from your credit report, a borrower should consider improving the following key factors to improve your loan application.
Poor credit may result in the rejection of your 2nd mortgage application. Traditional lenders use this score to assess their risk as borrowers. Different lenders consider varied scores to be good, average, or bad. To know the perfect credit scores, you must see the eligibility criteria of respective lenders. Some tips to improve credit score are paying back on time, limiting the use of credit cards, and paying all the utility bills timely.
Debt to income ratio
Lenders can also reject 1st mortgage applications if the DTI ratio is too high. Look at this number to gauge your ability to repay your new loan while managing your current debt. Lenders generally prefer a ratio of 36% or less. However, in some cases, they may consider applications with up to a percentage of 50%.
To calculate your DTI, the lender divides the current monthly debt burden by your monthly income. For example, if your current monthly debt is $3,000, your gross income is $4,000, and your DTI ratio is 75% ($3,000 / $4,000).
Increasing your income is easier than doing it, but it can help you earn more credibility. The higher your income, the lower your DTI ratio may be. You will likely meet the lender’s minimum DTI requirements. To increase your income, consider starting a lucrative side business or mastering a popular skill to increase your earning potential.
Feel free to ask the lender to explain why they have declined the short-term mortgage application. Before applying for another loan, double-check your credit report to ensure everything runs smoothly. See if your credit score has improved. To increase your chances of approval, you should wait until you meet the lender’s requirements or choose another lender better suited to your financial situation. Always remember that although traditional lenders have arduous criteria to meet private lenders have a much more relaxed approach to business lending.