Written by Maryalene LaPonsie for U.S. News &
World Report Money
What
criteria do lenders consider when it comes to approving—or denying—your credit
card, auto loan, or mortgage application? From proof of income to recent
payment history, here are seven factors that can affect your loan eligibility:
When it
comes to good finances, credit
scores get a lot of press. Based
on a formula incorporating loan and repayment history, credit scores are often
touted as the reason someone gets approved for a credit card, auto loan or
mortgage – or denied one.
However,
some financial experts say the role of credit scores may be overblown. "It
is a very useful tool, but it's just one tool," says Kathleen Lindquist, a
certified financial planner with San Diego Wealth Management. In addition to
credit scores, lenders may look at everything from your housing history to your social media presence and
credit decisions.
Mortgage
and subprime borrowers may be subject to even greater scrutiny. That isn't to
say credit scores aren't important, but their role may vary significantly
depending on a lender's three-digit number. "If your score is greater than
750, the decision is made primarily on your credit score," says Rich Hyde,
chief operation officer of Prestige Financial, which specializes in auto loans
for buyers with subprime credit.
People
with lower numbers may find lenders begin asking for more documentation.
However, that isn't necessarily a bad sign. "We're in the business of
loaning money," Hyde says. "We're looking for the good things."
Mortgage
lenders also tend to have more stringent requirements, Lindquist says. Beyond a
credit score, they also look for details regarding income and assets to
determine whether a borrower will have the means to pay off a large loan with a
long term.
7 Other
Factors Lenders May Consider
All
lenders have their own criteria, but here are seven commonly considered factors
that can play a role in a credit decision.
1. Proof of income. It's not enough to
simply state your income. Some lenders want to see proof, either in the form of
pay stubs, bank statements or even old tax
forms.
2. Investment statements. Some lenders may also
want to see 401(k) or IRA statements, "particularly for those who are
retired and don't have an income," says Mikel Van Cleve, director of
personal finance advice for USAA Bank.
3. Employment history. Hyde says subprime
lenders often look for a stable employment history when weighing the likelihood
of a borrower being able to pay back a loan.
4. Housing history. As with employment,
lenders are looking for stability when it comes to housing. Frequent moves
could indicate money management
problems or increase a lender's
chances of not being able to track down a borrower who defaults on a loan.
5. Debt-to-income ratio. Sometimes broken down as
a payment-to-income ratio, this factor calculates debt as a percentage of your
income. "It's a good idea to keep that debt-to-income ratio below 36
percent," Van Cleve says. However, a higher ratio may not automatically
disqualify someone from a loan.
6. Recent payment history. If you have past bad
credit, a lender may consider when that occurred. Missed payments from three
years ago may not be a concern, but missed payments from last month could sink
someone's chances for a loan.
7. Social media. "Data companies are
continuing to look for new ways to help lenders," Van Cleve says. That
includes surveying social media sites for signs a potential borrower may be
irresponsible with their money. Van Cleve is quick to note this is a new
strategy of evaluating applicants and not one used by USAA Bank.
Surprisingly,
a bankruptcy may not mean you will automatically be denied a loan. "A
recent bankruptcy means you don't have other debt we have to compete
with," Hyde says.
Don't
neglect your credit score. While
checking your credit score every day isn't necessary, borrowers should still be
aware of their number. By paying on time and keeping credit card balances low,
you can boost your score and minimize the need for your entire financial life
to go under a microscope.
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