What Lenders Look for When Deciding to Give You a Loan

When deciding whether or not to give you a loan, there are a number of things lenders look for. Understanding each of these things and how you can improve upon them is beneficial when you try to get a loan, mortgage, or home equity loan.

Credit History

Your credit history is one of the main things the lending institution will look at when trying to decide if you are a good candidate for a loan. Your credit history information is collected by credit bureaus into one report called a credit report. In addition to creating this report, the credit bureau gives you a credit score that is based on this history. This score can range from 300 to 850 points, with bigger being better.

Several things are included in your credit report. First, the report contains y our name, your address, and your social security number. The credit history portion of the report includes information such as when you opened your financial accounts, the amount of money you own, and your credit limits. It will also include whether or not your accounts and been closed and if they were paid on time.

Any other information that is a matter of public record is also included in your credit report. This includes foreclosures, bankruptcies, repossessions, liens, and any legal judgments such as failure to pay your taxes or child support. Recent credit inquiries are also placed on your credit report. Having too many inquiries can reflect negatively on your overall credit rating.

Income

Your income is also an important consideration. This means providing the lending institution information about your current employment, including how much you have made and how long you have been working there. Included in this investigation, the lending institution will consider how much debt you are in compared to how much debt you are in. This comparison is called your debt-to-income ratio. Most lending institutions will want this ration to be less than 36% to be considered for a loan. In order to prove your income, you will probably need to show the lending institution proof of your income, such as tax returns or W-2s.

Your Home Value

If you own a home, the lender will also look at how much you still own on it and how much it is worth. This value is expressed as a percent. So, if your home is worth $100,000 and you still owe $80,000, you have a loan-to-value ratio on your home of 80%. The value of most homes increases the longer you own it. Therefore, you might need to get an appraisal of your home when applying for a loan in order to determine how much it is currently worth. Most home equity lenders want this loan-to-value ratio to be less than 80%.

To keep the loan-to-value ratio at 80%, the lending institution will limit the amount of the loan it provides. For example, if you owe $100,000 on the home and it is valued at $200,000, you have $100,000 in equity. But, the bank will only provide you an equity loan of $60,000 because $100,000 (the amount you owe), plus the $60,000 loan equals 80% of the $200,000 loan.