Steps to Take if Your Loan Preapproval Is Declined

Quick Answer

Here are steps to take if your loan preapproval is declined:

  1. Find out why you were denied
  2. Check your credit report
  3. Address the underlying issue
  4. Try to get preapproved again
A man taking steps after his loan preapproval was denied

The process of completing a full application for a loan requires loads of time and documentation. That's why many lenders offer the option to get preapproved first—a process that prescreens borrowers for eligibility. After collecting some basic information and running a soft inquiry on your credit, a lender lets you know if you're likely to be approved, and if so, the potential terms.

Preapproval is usually different from prequalification, though some lenders use the terms interchangeably. Prequalification is typically less comprehensive, and information isn't verified, so it can give you a sense of if you'd be approved, though without much certainty.

Preapproval can carry more weight, though how much can vary by type of loan. For example, getting preapproved for a mortgage or auto loan is quite rigorous compared to prequalification, and it offers a very good sign of approval upon full application. On the other hand, preapproval on personal loans functions more like a prequalification. Either way, if you applied for a loan preapproval and were declined, here's what to do next.

1. Find Out Why You Were Denied

There are a variety of reasons why your loan preapproval may have been declined by the lender. Some common reasons for denial could include:

Under the Equal Credit Opportunity Act (ECOA), you have the legal right to find out why you were denied a loan or line of credit. Lenders are required to either tell you the main reasons why you were denied, or inform you that you have the right to ask for the reasons within 60 days, according to the Consumer Financial Protection Bureau (CFPB). If you still have questions, you can try contacting the lender to see if they can provide any additional details or explain what you would need to qualify.

While it isn't enjoyable to face it, finding out what caused you to fail preapproval provides useful insight for the best way forward. It shows you what aspects of your finances need improvement so you can course-correct—and be more likely to see "approved" next time.

2. Check Your Credit Report

The ECOA also requires lenders who reject an application to provide your credit score that factored into their decision. They also must inform you of your right to request a free copy of your credit report that was evaluated, according to the CFPB.

It's wise to closely review any insight the lender provides, and it's very much worth it to request that free credit report. You can get a better sense of what's dragging your credit score down, and you can ensure there are no errors that you have the right to dispute or unauthorized charges that could point to fraud or identity theft.

3. Address the Underlying Issues

Once you've reviewed the information provided by the lender on why your loan preapproval was declined, you have a few options. One is to try to get preapproved elsewhere, perhaps with a lender that's more lenient. In exchange, however, you'll likely face steeper interest rates and higher fees.

The better your credit and financial health, the better terms you can qualify for. So if you don't need the loan urgently, use this time to take action to improve your finances, making future success more likely. For example:

  • If you were declined due to insufficient credit history, work on building your credit.
  • If your credit is established but your score is too low, take steps to improve your credit, like paying bills on time.
  • If your debt load was too high, make a plan to start paying down your debt faster and improve your DTI.
  • If your income was too low or employment wasn't stable enough, look for a new job or find ways to increase your income.

4. Try to Get Preapproved Again

After some time and effort, assess your income and debt, check your credit again and look at any other indicators that plagued you last time. Once your finances are in better shape, it's time to try again, whether you want to get preapproved for a mortgage or other type of loan.

You can go back to the same lender you applied with the first time, or you can choose a new one. Submit a new preapproval with your updated information, and the hope is that this time, you'll find success.

The Bottom Line

If you're denied preapproval with a lender, know that there are lenders out there with more lenient criteria; you'll just likely pay higher fees and interest rates. If time is on your side, it pays to be patient and spend the next few months shaping up your finances and credit score before trying again.

You can speed up the process with Experian Boost®ø, a free feature to give your credit a lift for expenses not normally featured on your credit report, including streaming services, utility bills and even your rent payments.