How Lenders Keep Score
“What’s the criteria I’m being judged on when trying to get financing for my first home?”
As American consumers, we’re used to having the power. “The customer is always right,” a slogan coined at Marshall Field’s department store in Chicago, has permeated society since its origination the late 19th century—giving us the confidence and control to judge products and services, as well as the companies that offer them. However, when it comes to financing your new home or refinancing the one you already own, the power is in the mortgage lender’s hands. The livelihood of most banks and investment groups are built on loan interest payments, and a lender’s primary concern is determining whether or not you will be able to pay back your debt based on their schedule.
Lenders are trained to make decisions to predict what type of consumer you are by analyzing several aspects of potential borrowers.
Who are you, and what do you offer the lender?
Lenders want to know who you really are financially, and this is ultimately determined by several important factors.
Your credit score will definitely be considered, and it is largely determined by:
- Past payment history: Payment punctuality accounts for roughly 35 percent of your credit score.
- Amounts owed: Outstanding balances contribute to about 30 percent of your credit score.
- Length of credit history: Your active credit history accounts for 15 percent of your credit score.
- Amount of new credit: Red flags start to wave when you take on more credit or even apply for new credit within a short period.
- Types of credit: Your use and potential overuse of credit cards, retail accounts, and installment loans have a 10 percent impact on your overall score.
What are your plans?
You often can’t apply for a loan without telling the lender what the money is intended for. For example, without a detailed plan of action, the lender may assume the worst for the money you wish to take out and that you may be potentially overexposed and could potentially default on the loan. However, if you are attempting to purchase a car, renovate your home, or invest in a business—lenders often view these investments as wise and are more likely to provide financing.
Where do you plan to borrow?
Online lending offers an alternative to traditional bank loans and is quickly becoming a popular option due to greater online competition and expedited loan approval. However, with online lenders, fraud-awareness and reputability are major concerns. Always ensure that you’re only dealing with trustworthy online lenders, and never provide private or personal information to non-secure or ostensibly unprofessional companies. Conversely traditional banks, both large and small, as well as credit unions in your area, must deal with federal and state regulators who can dictate what they can take in loans and loan types.
As an alternative do not forget your local mortgage brokers and bankers in your backyard who know your neighborhood and the local resources that usually work to your advantage in closing our loan. While they are governed to the same lending standards they are not regulated to the degree of big banks based on their lending and deposits and are more accountable to the client than the faceless online entity.
When do you pay?
A crucial part of the lending process is the length and terms of the loan. Your mortgage professional can guide through the available options for the length and term of your loan. Often these terms will help dictate what you can qualify for, not every loan is the same for every borrower. Only accept loan terms that you understand and can live with, and factor in the final cost over the life of the loan.
How does a lender decide?
After your financial situation has been thoroughly analyzed and reviewed, the final approval breaks down into the following areas:
- Credit: Credit scoring is a method creditors use to help determine whether you’re capable of repayment. Information about you and your credit experience, such as your bill-paying history, the number and types of accounts you have, collection actions, late payments, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report.
- Income: Lenders want to make sure you can afford to make payments on your loan. Naturally, a higher income translates to increased bank willingness to lend.
- Collateral: What assets can the lender seize if you default on your loan? Typical collateral is usually a house or car. The more value you can provide as collateral, the more likely you are to secure the loan.
As you can see there are many factors that go into every loan scenario, unique to that individual borrower. Knowing how lenders keep score in advance will only help to improve your odds of an easy loan approval.