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5 Things Lenders Check In A Loan Application

If you are applying for a loan, there are several things you need to check to ensure you have the best possible chance of securing a loan of your choice that offers you a great annual percentage rate (APR) and minimum fees. While advancing loans, lenders want to make sure they will get their money back and as such scrutinize several details apart from your credit score.

Some of these aspects, which lenders look out for, are mentioned below.

Credit history

While applying for a loan, lenders typically want FICO scores of over 700. There are a number of contributing factors, that determine your credit score and it is important to work on all of them. Some of these factors are as follows:

Bankruptcy and foreclosure
Defaults on auto-loans, student loans, and other loans
Outstanding credit card debt

Any of these might raise a red flag in your loan application, so make sure you try to stay on top of these things.

Debt-to-income ratio

A lender will closely examine how much debt you have relative to your income. If you have a higher income, they might be convinced of your ability to make regular payments. However, it is important to make sure that your DTI ratio is 43% or lower. Beyond that, your loan application might be rejected or you might be stuck with a higher APR.

Employment and income

A lender will also closely examine your job history and income for the past 24 months. They will also assess extenuating circumstances like the stability of the career you have chosen, ability to pay back in the event of a market recession, and the like. Lenders want to make sure you have been employed by the same organization for at least two years so that your job is stable.

Liquid assets

Lenders will typically gauge what your income is, but in the event of loss of employment, they want to make sure you have some easily accessible money lying around to make your payments. They will closely examine your savings account or money tied up in bonds. Ideally, you should have six months income to make your mortgage payments and property insurance.

Collateral

Collateral is the assets that the lender can seize if you fail to make your payments. If you apply for a mortgage or an auto-loan, lenders will make a risk assessment and determine what kind of hit they might take. If you are taking out a mortgage, they will also consider the down payment you are making. If you make a higher down payment, the lender would be more inclined to compromise on the interest rate. The term of the loan also plays an important role. A shorter term allows the lender to assume a smaller risk as opposed to a longer term.

Applying for a loan is like walking a tightrope; you have to keep several different factors in mind, but if you shop around, more often than not you do find what you are looking for. A favorable credit report without any errors like a foreclosure or a bankruptcy will also hold you in good stead.

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