Beyond Credit Scores: 7 Factors That Influence a Loan Application

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When it comes to good finances, credit scores get a lot of press. Based on a formula that incorporates loan and repayment history, credit scores are often touted as the reason someone gets approved for a credit card, car loan, or mortgage. a mortgage – or refuse it.

However, some financial experts say the role of credit scores can be overstated. “It’s a very useful tool, but it’s just one tool among many,” says Kathleen Lindquist, Certified Financial Planner at San Diego Wealth Management. In addition to credit scores, lenders can review everything from your real estate history to your social media presence and credit decisions.

Mortgage and subprime borrowers may be subject to even greater scrutiny. That’s not to say credit scores aren’t important, but their role can vary greatly depending on the lender’s three-digit number. “If your score is above 750, the decision is made primarily on your credit score,” says Rich Hyde, chief operating officer of Prestige Financial, which specializes in auto loans for buyers with subprime credit.

People with lower numbers may find that lenders start asking for more documentation. However, this is not necessarily a bad sign. “We’re in the business of lending money,” Hyde says. “We are looking for the good stuff.”

Mortgage lenders also tend to have stricter requirements, says Lindquist. Beyond a credit score, they also look for income and asset details to determine if a borrower will be able to afford to repay a large loan over the long term.

7 Other Factors Lenders Can 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. Simply stating your income is not enough. Some lenders want to see proof, in the form of pay stubs, bank statements, or even old tax forms.

2. Investment declarations. Some lenders may also want to see 401(k) or IRA statements, “especially for those who are retired and have no income,” says Mikel Van Cleve, director of personal finance counseling for USAA Bank.

3. Employment history. Hyde says subprime lenders often look for a stable work history when assessing a borrower’s likelihood of being able to repay a loan.

4. Housing history. As with employment, lenders seek stability in housing. Frequent moves could indicate money management issues or increase a lender’s chances of not being able to track down a defaulting borrower.

5. Debt to income ratio. Sometimes broken down into payment-to-income ratio, this factor calculates debt as a percentage of your income. “It’s a good idea to keep this debt-to-income ratio below 36%,” Van Cleve said. However, a higher ratio may not automatically disqualify someone from a loan.

6. History of recent payments. If you’ve ever had bad credit, a lender can consider when it happened. Missed payments from three years ago might not be a problem, but missed payments from last month could lower someone’s chances of getting a loan.

7. Social networks. “Data companies continue to look for new ways to help lenders,” says Van Cleve. This includes investigating social media sites for signs that a potential borrower might be irresponsible with their money. Van Cleve is quick to note that this is a new candidate assessment strategy and not the one used by USAA Bank.

Surprisingly, bankruptcy may not mean that you will automatically be denied a loan. “A recent bankruptcy means you don’t have any other debt that we have to compete with,” Hyde says.

Don’t neglect your credit score. Although it is not necessary to check your credit score every day, borrowers should still know their number. By paying on time and keeping credit card balances low, you can boost your score and minimize the need to put your entire financial life under the microscope.

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