How long does a declined loan stay on your credit file

Q: What happens if loan gets declined?

If you are not approved for a loan, you will receive whats called an adverse action letter from the lender explaining why. By law, youre entitled to a free copy of your credit report if a loan application is denied.

Having your home loan application rejected can impact your credit score and the process may be reflected in your credit history. But don’t fear, as there are ways to rectify this and put yourself in a better position to gain mortgage approval.

Table of Contents Show

How to recover after a mortgage rejection
Does loan rejection affect credit?
How soon can I apply for a loan after being declined?
What happens if loan gets declined?
How long does it take for a loan to be removed from credit report?

Any credit product application has the risk of impacting your credit score. When you apply for a credit product, like a credit card, personal loan or a home loan, the provider will need to perform a hard credit check on you.

This is done to determine whether you can comfortably service the credit product based on your previous credit history. And if the lender determines that you are not a suitable customer, they may reject your home loan application.

While one home loan rejection may not necessarily lower your credit score, the hard credit check will still be on your credit history. And if you then proceed to frantically apply for even more home loans without rectifying what caused your first application to be rejected, you will have multiple hard credit checks on your credit history.

This we know can hurt your credit score and lead to more credit providers rejecting your applications, as this type of behaviour is considered risky and ‘credit hungry’.

So, if you’ve been rejected for a home loan application and you’re worried about your credit history, it’s worth holding off on a second application and first improving your financial situation and credit score before applying again.

How to recover after a mortgage rejection

Must-do steps following a mortgage rejection:

Hold off applying for future home loans
Investigate why your application was rejected (poor credit, outstanding loans etc.)
Grab a copy of your credit history and review for errors or explanations
Work on improving your financial situation and credit score
Add positive events to your credit history

A mortgage application rejection is not the end of your property buying journey. Instead of re-applying for a mortgage immediately, it’s time to identify why your application was rejected in the first place so you can boost your chances of approval next time.

Some of the most common reasons a home loan application is rejected includes:

You have adverse events in your credit history, such as defaults or late payments. exceeding 14 days.
You have existing liabilities that have limited your borrowing capacity, such as a car loan, outstanding credit card balance or even a HECS/HELP debt.
You do not have any ‘genuine’ savings that indicate you can budget and save your income.
Interest rates have risen and you can no longer comfortably service the loan balance you’ve applied for on a higher rate.

If you believe your rejected application was a result of your credit history, or if you’ve never reviewed your credit file, it’s time to request a copy of your credit history. Australian credit bureaus, Experian and Equifax, can provide you with a free copy of your file once a year.

If you’re just looking to review your credit score, RateCity’s Credit Score Hub can provide you with your scores for free in seconds.

Look at your credit history and thoroughly review all events listed. Ensure that there are no errors, such as a family member’s information incorrectly added to your file. You may be surprised to see what events have been recorded that you may not be aware of, such as a late payment for a utilities bill shared with a partner.

Negative events in your credit history may work to reduce your credit score, but they do not last forever. This is how long adverse events may stay on your credit history:

Repayment history – 2 years
Credit enquiries and applications – 5 years
Writs, summons and court judgements – 5 years
Payment defaults – 5 years
Bankruptcies, debt agreements and personal insolvency agreements – 7 years

In some situations, home buyers may need to wait until these events have left their credit history before their credit score may improve.

Luckily, there are positive events you can practice that should be reflected on your credit history and may boost your score, including:

Paying off outstanding loans and credit card balances. For outstanding credit cards, it’s worth considering making more than minimum repayments too.
Making your credit repayments on time, including for phone bills and utilities. Consider automating your payments as direct debits to avoid late penalties.
Budgeting to save your income consistently over time.

It may take several months to get your financial situation back on track, so be realistic about your timeline and goals. But it’s worth taking the time to work on your application and your suitability as a home loan borrower before you apply to another mortgage lender.

The last thing you want to do is have multiple hard credit checks and rejections back-to-back. Boosting your chances of next home loan approval is one of the best things a buyer can do following a mortgage rejection.

Does loan rejection affect credit?

When a bank or credit institution makes an inquiry, it is known as a hard inquiry. A hard inquiry downgrades your CIBIL score; hence, you should avoid multiple loan applications from different banks simultaneously, as every rejection will further reduce your CIBIL score.

How soon can I apply for a loan after being declined?

You should wait at least 30 days before applying again, but experts recommend waiting six months to give yourself the best chance of qualifying. While you are waiting to reapply, you should work on resolving the reason for your loan denial.

What happens if loan gets declined?

If you are not approved for a loan, you will receive what's called an adverse action letter from the lender explaining why. By law, you're entitled to a free copy of your credit report if a loan application is denied.

How long does it take for a loan to be removed from credit report?

Most negative items should automatically fall off your credit reports seven years from the date of your first missed payment, at which point your credit scores may start rising. But if you are otherwise using credit responsibly, your score may rebound to its starting point within three months to six years.