Okay… so you need some money to get that new furnace… or make a significant home improvement… or replace that twelve-year-old car. That might mean going to a bank, or other creditors, and applying for a loan. How do you know if your application will be accepted or rejected? Unfortunately, you won’t know until the creditor does their analysis and determines your creditworthiness.
There are a few ways to help increase your chances of getting accepted for that loan. We’ve listed the top 5 (but remember, there are more – especially for getting a mortgage). So do your research, but start here…
5 Ways to Increase Your Loan Approval Potential
What’s Your Creditworthiness?
Since lenders consider your credit the main factor when determining your creditworthiness, it’s important to know where your credit stands before applying for a loan. And that includes knowing your credit score and what’s in your credit files from at least one of the three major credit reporting agencies.
Once you know this information, check the credit requirements for the specific lender(s) you’ll be approaching. Make certain your credit meets their requirements, otherwise, you’ll probably be in for a disappointment. Remember, even if your credit does meet their requirements, it doesn’t mean you’ll be approved. However, the closer your credit factors match their prerequisites, the more likely you are to get approval.
What’s Your Income?
Many lenders require a minimum income (individual and joint incomes are analyzed) and you should discover their income requirements before applying for a loan. Does the lender want you (and your spouse) to bring in a certain amount of money each month? Do they expect you to be employed by one company for an extended period of time? Do you receive your income through direct deposit? These are just a few of the questions a lender will ask.
Find out more about lender income requirements so you’re ready to answer the questions on the application or the questions that come directly from the loan officer’s mouth. This information is crucial to have before deciding to which lender you want to apply.
What’s Your Collateral?
First, what is collateral? Collateral is something pledged as security for repayment of a loan, to be forfeited in the event of a default. Examples of collateral could be a home, a car, property, even a commercial building. Collateral can also be a source of liquid funds that the lender can use in case of you defaulting on the loan.
Basically, the more collateral you have, the lower the risk for the lender. This can increase your chances of getting a loan approval. It’s not a guarantee, of course, it’s just another step in a positive direction.
What’s Outstanding Debt?
Your outstanding debt is significant when it comes to your debt-to-income ratio (DTI). Your DTI compares how much you owe each month as opposed to how much you earn. Simply stated, it’s the percentage of your gross monthly income (before taxes) that goes toward payments for rent, mortgage, credit cards and other debt.
The higher your DTI, the more of an indication it is to a lender that you’re using a lot of your income to pay off other loans. That’s the sign of a big risk for any lender. It’s a good idea to pay off some of your other debts before applying for a loan. Typically, 43% is the maximum DTI one can have while still meeting the requirements for a mortgage. Still, it’s best to keep DTI at or below 36%.
What’s Your Reason?
Why do you want a loan? Do you want to consolidate debt, get a mortgage or start home improvements to increase the value of your home?
If the purpose of your loan doesn’t match the lender’s requirements or what they feel is a legitimate purpose to put their money at risk, the chance of approval is low. Make sure your reason fits in line with a lender’s expectations and you’ll be moving closer to approval.
So many myFICO members have been accepted AND rejected for loans. See their stories (and their venting) at myFICO forums.