You’ve decided you’re ready to buy a new car or your first house. You’ve been paying all your bills on time and have been careful about how you use your cards, all so you can have the best credit score possible. That’s all you need to boost your chances for being approved, right? In actuality, lenders look at more than just your credit score before deciding whether to accept your application. Get a full lay of the land to put your anxiety to rest and better understand why your application may be declined.
Income
You may have a great credit score, but that doesn’t necessarily mean you’ll be able to pay back a loan regularly. That’s why lenders like to know your current income. If you have a steady influx of cash, one that can handle loan payments and all your other financial obligations, lenders have more confidence that you’ll pay your loan in full and on time.
Expenses
You may have a solid income, but that may be canceled out if you have several substantial expenses. For instance, you may have a high car payment or mortgage that sucks up a lot of your high earnings. Lenders may deem you a high-earning risk and reject your application.
Employment History
Do you have a steady job history, or is there a lot of jumping around from employer to employer in your employment history? Just like a steady income, steady employment is a sign to lenders that you’re more likely to be able to keep up with your payments. As long as your history shows you remain in positions for at least two to three years, lenders are likely to view you as a solid candidate.
Down Payment
How much will you contribute toward your down payment? The smaller your loan amount, the better your chances of being approved for your loan. Generous down payments make you less of a risk to lenders. Additionally, you’re more likely to get a better interest rate on your loan if you drop a large down payment.
Overall Cash Flow
So, you’ve got the income and the necessary employment history. Great, but are you saving any of that money you’ve got flowing in? Your credit report doesn’t note your cash flow and how much you have saved for a financial emergency. Say that you become injured and cannot work. Unfortunately, you’ll still have to pay your bills even when you aren’t going to work regularly. Lenders want to know that you’ve got the savings, bond, stocks, or other assets to keep paying off your loan while you recover.
Loan Term
Shorter loan terms are something else lenders like to see on an application. With that shorter term, you give lenders the impression that your ability to keep up with payments is less likely to change over time. Opting for a shorter loan term works out for you as well. You may have a bigger monthly payment, but you won’t waste as much money on interest payments either.
Education
In regards to your education, while you may have a higher earning potential with an associate’s, bachelor’s, or master’s degree, there’s also the possibility that you have unpaid student loans. Lenders may hesitate to approve your application if you have a lot of unpaid student loan debt. That may go double for young borrowers fresh out of college who have yet to fully tap into their earning potential, potential unhindered by student loans.
Length of Time at Your Current Residence
Just like it’s better to show you stay with employers for a lengthy period, the same is true of your residential history. Essentially, having the same address for an extended period of time is a positive reflection of home stability. A lot of hopping around from place to place may give lenders the impression that you may not be so great at making your rent payments on time. If you have a reason for doing a lot of moving around, such as your job, then be sure you share that fact with lenders.
Professional Licenses
Lenders also note whether you have earned professional licenses. It’s no secret that lawyers, doctors, auto mechanics, and the like have high earning potential. That is especially true if such professionals have their own business or practice. For that reason, lenders are more likely to approve you if you possess such a license.
Collateral
If you’re applying for a home loan, the property will likely be used as collateral if you default on the loan. The same applies if you’re applying for a car loan. On the other hand, you may choose to put your current home or vehicle up as collateral. Either way, lenders often scrutinize the overall value of the collateral to determine if that value is enough to cover the remainder of your loan if you default on it.
How Often You Switch Phone Numbers
Just like your home, lenders like to see applicants who’ve had the same phone number for an extended period. This shows a level of stability, which bodes well for a person’s ability to keep up with loan payments.
Broaden your focus when applying for a loan. Lenders prefer multi-faceted applicants who have more than just a great credit score.
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