How to recover from a loan denial: 4 insider tips from a former loan processor

One of the worst things I had to do as a loan processor back in my early mortgage days was to tell someone their loan application had been denied. It was especially heartbreaking to see the light of a first-time homebuyer’s excitement dim to the reality of the loan denial conversation.

It’s a tough time to apply for credit, especially if you don’t have a high credit score. The Federal Reserve is keeping a close eye on interest rates in its battle against inflation, lenders are tightening their purse strings and rejection rates are on the rise.

Whether you’re denied for a new credit card or the personal loan you need to consolidate debt, a little knowledge, planning and persistence — and a former insider’s glimpse inside lenders’ decision-making machinery — can help you turn that thumbs down into a thumbs up. Here are my top four tips for rebounding from a credit denial.

1. Don’t take it personally

Borrowers had a variety of reactions when I shared loan denial news, but tears, surprise and devastation were the most common. In a few cases, there was palpable rage against the lending machine, taken out on me with a series of expletives that would make Robert De Niro blush.

Automated scoring algorithms didn’t exist yet, so the decisions were usually made by a human underwriter based on the evidence presented in the loan package. Denied borrowers often complained the process was too subjective, painting me as an evil bureaucrat arbitrarily slamming red “denied” stamps on a pile of paperwork with glee.

Although manual underwriting is pretty rare these days, the lending principles that guided those personal decisions have been programmed into automated lending systems. There are a few key takeaways from those experiences:

• Lenders don’t want to deny loans. When a loan was denied, the underwriter and I often met to brainstorm ways to make it work. At a minimum, we would share why the loan couldn’t be approved as-is and offer suggestions to approve eligibility. The bottom line is that lenders don’t make money if they deny a loan.
• They also don’t want to approve loans you can’t repay. As much as a lender may want to approve your loan request, they also won’t make money if you fail to repay the debt. And if they issue too many loans that customers can’t repay, regulators take notice. Each loan application must therefore be reviewed with healthy skepticism.

2. Talk to the decision maker (if you can)

If you don’t meet a lender’s eligibility requirements, you’ll likely receive an automated denial notice, followed by a regulatory form that outlines the reason for the rejection. For 90 percent of rejected borrowers, that’s where the story ends — only 10 percent requested an explanation for their loan denial, according to Bankrate’s Credit Denials survey.

Understanding why your application was rejected can help you make the necessary corrections to turn that “no” into a confident “yes.” If you can speak to a human — perhaps a customer service agent, loan officer or lending manager — ask the following questions:

1. Why was my loan application denied? Ask for an explanation of the specific factors that led to the rejection. If your credit score was too low, what score would you need to be reconsidered? If you had too much debt, how much would you need to repay before your debt-to-income ratio improved sufficiently?
2. What steps I can take to get approved in the future? The lender’s answer to this question can help you gauge how close (or far) you are from approval. Don’t be afraid to ask, “If I take the steps we’ve discussed, do you think I could be approved six months from now?”

The best lenders have educated loan officers who are happy to provide strategies to help you become a future customer.

3. Take steps to improve your approval odds

After you’ve recovered from the sting of credit denial, it’s time to get to work on improving your eligibility. For most consumers, the tried-and-true advice is best: boost your credit score, increase your income and minimize your debt load. In fact, nearly 1 in 4 rejected applicants (23 percent) took steps to improve their credit to boost their odds of getting approved in the future, according to Bankrate’s recent survey.

In those early years as a loan processor, I picked up a few more tips to help you recover from a denial:

• Pay off credit card debt for the fastest — and biggest — credit score boost. Paying off credit card debt was often the fastest path to improving a score from denial into approval land when I processed mortgages. Yet fewer than 2 out of 10 rejected applicants (16 percent) paid down debt to boost their odds of getting approved in the future, according to Bankrate’s recent survey.
• Tell the whole truth. Seems obvious, right? You’d be amazed by how many loans are denied because of undisclosed co-borrowed loans, old unpaid debt in another state or even that piece of land you inherited and forgot to mention. It’s much harder to explain why you didn’t disclose something than just being upfront about it from the start.
• Paint your entire financial picture. Some borrowers don’t disclose everything about their assets or debts, perhaps because of fears of fraud or distrust in the banking system. People tend to be tight-lipped about money, even with trusted relatives, so why would they reveal their entire financial hand to a stranger? This is the easiest denial to overcome: Just provide the requested information.
• Switch to salaried or hourly work. If you’re self-employed or a gig worker, consider switching to a salaried or full-time hourly job. A consistent, predictable income is a common requirement for most forms of borrowing. In many cases, you can be approved with evidence of your first paycheck, and some lenders even accept an employment contract with a start date within a few months.
• Take on a side hustle or second job to boost your income. Slightly more than 1 in 10 rejected borrowers (15 percent) increased their income as a means to improve their approval odds. This may be a longer path to approval, since lenders may require proof of six months’ worth of additional income.
• Disclose your savings accounts. All of them. This advice mostly applies to mortgages, since other loan products typically don’t require you to disclose assets for approval. I saw many loan rejections flip to approvals with the addition of a few thousand dollars of additional assets. To a lender, those assets mean you’re able to make an extra months’ worth of payments if finances get tight.
• List all of your income sources. Lenders have begun recognizing additional sources of income as the makeup of American families has changed. That means the income you receive from a grandma living with you, a roommate renting a room or a relative repaying money you loaned them could push you over the denial border into approval land.

4. Shop several lenders and ask (a lot) of questions

Not all lenders are created equal. The lending marketplace has exploded in recent years — your friendly neighborhood bank may wind up being the least friendly place to get a personal loan. Online marketplace comparison sites like Bankrate may offer a faster path to a lender that will green-light your loan application.

• Shop around with online lenders, banks and credit unions: An online lender may be more likely to approve your application than a big-name bank. They tend to take more risks on borrowers with borderline or bad credit than banks and credit unions. That said, your bank may be willing to override a denial if you keep a sizable chunk of cash on deposit with them. Make sure you compare similar terms with each lender and watch for fees and perks like rate discounts for autopay.
• Visit marketplace comparison sites: Sites like Bankrate match prospective borrowers with lenders. With one application, you may receive multiple loan offers from partner lenders. This can help you compare several loan options in one fell swoop, streamlining your application process.
• Watch for trends in online user feedback: Reddit and Quora may give you insight into whether lenders are known for approving borrowers denied elsewhere. However, bad credit lenders tend to receive negative reviews because they accept tougher customers. The best way to get a feel for a lender is to talk to someone on the phone.