What Lenders Look For

Every lender uses their own credit criteria when reviewing applicants for credit. Your credit report and score (credit score note) are important parameters, but so are other factors that may include the following:

1. Credit Standing:
   
   Lenders may review your credit report to analyze how well you manage your credit obligations.
   
   They may approve or reject a credit application based on the credit score or other determinants that may include, for example:
   
   — no more than 2x30
   — no more than 1x60
   — no 1x90
   
   This means if the credit applicant had
   
   — more than 2 times past 30 days late payment,
   — or more than 1 times 60 days late payment,
   — or 1 time 90 days late payment
   
   reject the application.
   
   We have more information on
   credit management || credit reports
   
   
   
2. Credit Capacity:
   
   Lenders will approve applicants for credit when they meet capacity levels to repay the loan.
   
   This is based upon your income and your current debt obligations. See note on Qualifying Income Ratios below.
   
   Lender may also review your credit report for open revolving credit lines that have zero balances.
   
   For example,
   you may have applied and received a credit card from a lender years ago that is no longer in use but remains open at zero balance.
   
   Every so often, the old credit card company may increase your credit line to prompt you to return. But you do nothing. The increase is reported to the credit agencies.
   
   Even though you have a zero balance in the account, there is the "potential" that you can use the card and incur charges up to your credit limit, thus affecting your income ratios noted below.
   
   Some lenders will add up all open line balances and use the aggregate total in their formulas for credit capacity. Under this credit review, the applicant may be rejected even though they have a very good credit history and maintain low credit card balances.
   
   This is why you should close accounts that are not in use.
   
   We have more information on
   credit management || credit reports
   
   
   
3. Character:
   
   This is really important when applying for business-related loans and lines.
   
   Lenders want to know whether your day-to-day dealings are honest and straight forward.
   
   Lenders will ask for references of other businesses and suppliers. For consumer loans, lenders may request a reference from your employer.
   
   
   
4. General Reputation:
   
   Very important for consumer and business credit applications.
   
   Lenders may review the credit report for:
   
   — length of employment:
   — frequent employment changes indicate instability
   
   — credit inquiries:
   — frequent credit inquiries shows lack of credit management
   
   — credit payoff vs. transfers:
   — lenders like to see loan payoffs on the report
   
   Lenders may also use references to gauge applicant reputation.
   
   We have more information on
   credit management || credit reports
   
   
   
5. Mode of Living:
   
   Lenders understand that younger people are "debtors". They first incur debt as they start their path through life.
   
   As younger people become married, have children, and eventually increase their overall income over time, they begin to payoff debts and accumulate assets such as mortgage equity, investments, and savings.
   
   If a person submitting an application does not fit this profile, they may be viewed as "risky" applicant by the lender's criteria.
   
   That is why lenders collect information related to your asset holdings. It is a good policy to open and maintain deposit accounts such as savings, money markets, and the like prior to submitting loan applications.
   
   We have more information on
   credit management || credit reports
   
   
   
6. Collateral:
   
   Lenders may request the applicant to collateralize the credit application. This is very common for home mortgages and auto loans.
   
   Collateralized loans allow the lender to repossess the asset in the event the applicant fails to meet their credit obligations.
   
   Other assets that may be used as collateral include investments and property.

Qualifying Income Ratios:

• Your capacity to repay the loan is an important factor for lending institutions to qualify an applicant for a loan.
  
  If capacity ratios are too high, the application will be rejected unless the applicant changes one of the following:
  
  
  • reduces their borrowed amount
  • increases their amount of down payment
  • qualifies for a loan with a lower rate
  • applies for federal assistance sponsored loans
  • increases their income
  • pays off or consolidates outstanding debts
    
    note that one of the following debts that can hurt first-time home mortgage applicants is multiple student loan debt
    
    you can consolidate outstanding student loans into one low payment that can improve your income ratio: click to see if you qualify
    

Lenders use two debt ratios to measure capacity:

1: The "housing ratio":
(used for mortgage-related loans) calculated by dividing monthly housing expenses by your gross monthly income. As a basic rule, the housing ratio should not exceed 28%.

What are your monthly housing expenses:

• mortgage loan payment on your home including interest and principal
• real estate taxes
• hazardous insurance
• private Mortgage Insurance, if any
• other mortgage related insurance
• homeowner's association dues
• ground keeping fees
• property leases
• other special assessments and financings
  

Monthly Income includes the following:

• employment income
• overtime bonuses and commissions
• net self employment income
• alimony, child support and income from public assistance
• social security, retirement, and VA benefits
• workman's compensation or permanent disability payments
• interest and dividend income
• income from trust, partnerships, etc.
• net rental income

Housing Ratio Calculator:
Input the following data to calculate your housing ratio:

If you don't have your real estate tax or insurance figures, the American Housing Survey shows that the median taxes paid averaged $12 per $1,000 in home value. The property insurance paid averaged $30 per month.

You can lookup your property tax assessments by community: http://www.statelocalgov.net

=
Enter the estimated monthly mortgage payment or enter your loan parameters below to calculate: Mortgage loan amount: Number of months to repay: Home mortgage loan rate (APR): %
Estimated Taxes per Month:
Estimated Insurance per Month:
Estimated Other Expenses per Month:
Total Monthly Income:
Housing Ratio (should be around 28%):	%

2: The "debt-to-income ratio":
calculated by dividing your fixed monthly expenses by your gross monthly income. As a basic rule, the debt ratio should not exceed 36%.

What are your fixed monthly expenses:

• monthly housing expenses included above
• monthly installment loan payments such as:
  — auto,
  — second mortgages (home equity)
  — other personal loans
• monthly revolving credit line payments such as:
  — credit cards,
  — unsecured credit lines
  — home equity lines of credit
• real estate loan payment such as non-income producing property
  — second home
  — vacation homes
• alimony and child support
• any tax or legal assessments.

Debt-to-Income Ratio Calculator:
Input the following data to calculate your housing ratio:

Estimated Total Housing Expense (from above):
Est. Total Monthly Installment Loan Payments:
Est. Total Monthly Revolving Credit Line Payments:
Est. Monthly R. Estate Non-Income Loan Payments:
Est. Monthly Alimony and Child Support Payments:
Est. Monthly Tax and Legal Assessments:
Est. Monthly Other Payments:
Total Monthly Income (from above):
Debt-to-Income Ratio (should be around 36%):	%

Getting Approved:

• Prime Lenders:
  
  Prime lenders offer the best lending rates and flexible loan terms and balances. The higher your credit profile, the lower the overall cost of your loan.
  
  Prime lending is offered by all banks and other finance institutions.
  
  Getting approved for prime lending interest rates and terms require the following determinants (these determinants may vary by lender):
  
  
1. credit score 700 and above:
   see credit score information
   
   
2. good-to-excellant credit history:
   see discussion on credit reporting
   
   
3. income ratios below guidelines:
   see qualifying income ratios above
   
   
4. meet certain lender requirements:
   employed, certain assets, well-managed bank account, etc.
   
   

If you meet this criteria, your chances of approval are great. See finding the right lender at our SayLending network.

• Sub-Prime Lenders:
  
  Sub-Prime lenders offer lending rates that are slightly higher than Prime Lending rates. Terms and balances may not be as flexible.
  
  Sub-Prime lending is available for applicants whose credit criteria fall below Prime Lending levels. Their credit history may show some late payments and/or higher than normal debt-to-income ratios.
  
  Many banks offer sub-prime lending through divisions and special operations. The most common names in sub-prime lending include:
  
  — Household Finance
  — The Associates
  — Conseco
  — Others
  
  Getting approved for sub-prime lending may require the following determinants (these determinants may vary by lender):
  
  
1. credit score 540 and above:
   see credit score information
   
   
2. fair-to-good credit history and report:
   see discussion on credit reporting
   
   
3. income ratios at or within guidelines:
   see qualifying income ratios above
   
   
4. meet certain lender requirements:
   employed, certain assets, etc.
   
   

If you meet these criteria, your chances of approval are great with sub-prime lenders. See finding the right lender at our SayLending network.

• Secondary Lenders:
  
  Secondary lenders will generally approve almost anyone for credit. But the interest rates and terms are quite costly.
  
  Secondary lending is available for applicants whose credit criteria is poor and whose criteria falls below sub-prime lending. Their credit history may show loan defaults, late payments, collections liens, and in some cases, past bankruptcy.
  
  See credit score information
  
  Getting approved is fairly easy. But the interest rate and terms can be at the maximum levels as regulated by State agencies.
  
  Secondary lending is for credit applicants who need to improve their credit history or who fail to receive credit approval from sub-prime lenders.