When setting the criteria for mortgages or loans, Lenders have a particular system for choosing people who qualify and determining their credit limits. It’s curious for the consumer how financial institutions decide, what factors make or break a reasonable interest rate and how you can assure approval.
Some of the processes somewhat hinder the type of loan the lending company is presented with. A mortgage is a forbrukslan (consumer loan) that’s more involved and slightly more complex than other loans.
It’s a secured loan for which a borrower must put up an asset to back the funds or collateral if there is a loan default.
Usually, the home serves as the collateral; the substantial amount for the loan warrants backing the funds with the house itself. If the client is unable to continue making the loan repayments for some reason, the lender will foreclose on the property, and the borrower would need to move.
But how does a lending provider make the initial decision to give the potential homeowner a loan opportunity? What criteria go into that determination? Let’s learn together.
What Qualities Stand Out For Lenders Deciding Criteria For The Best Consumer Loan
Of course, every borrower wants to obtain the best consumer loan on the market when attempting to purchase a home. That would mean the lowest interest rate, minimal fees, and ideal terms. Find out how to compare loan terms at https://www.moneymanagement.org/blog/how-to-compare-your-terms/.
Lenders have a specific system when deciding whether a borrower qualifies for a loan at a particular rate and what the account limit should be.
In making the decision, your FICO credit score, income to show the capacity to make repayments, and the property you’ve selected to determine the sum of the loan and serve as collateral; each plays a part. Let’s look at each of these individually.
FICO credit score
When determining whether you are eligible for a loan, a primary consideration is your credit rating. The range with FICO scoring begins at 350 and goes up to 850, with the highest number being the desired rate.
The higher your number, the better the interest rate and the more favorable the loan will be overall. The elements of the credit history a lender will review include:
- Bill repayments
- Outstanding debt
- Diversity of accounts
- Credit utilization
The standards were a bit more relaxed before the 2008 financial crisis. Now, the average borrower needs to come with an application showing approximately 650 for a credit score or close to that for consideration. In order to get the best loan with the most favorable rates and terms, you should come with a FICO rating at or above 760.
For those who don’t meet these criteria, you’re not counted out. That merely means you need to take some time to work towards cleaning up your reports and paying down some debt.
Also, some of the information on the histories could be incorrect. It pays to pull the reports and review these for errors disputing any discrepancies.
Income
The ability to repay is essential for a lender reviewing an application for approval. The loan company will review the current debts against your income to determine the “capacity” for repayment.
The goal is to find stability with earned income and not use supplements like incentives or bonuses because these aren’t something you can necessarily rely on each year.
Debt would include:
- Any balances held on other loans
- The possibility for other mortgages or real estate
- Credit cards
The greater the “debt-to-income ratio,” the higher the risk for the loan provider. Those with low risk, often considered at less than 35%, are more likely for loan qualifications.
Collateral
Another primary consideration and the determining factor for how much the lender will allow you to borrow is the property you’re considering for purchase since this will serve as collateral or property used to back the funding if there’s a default on the loan.
The provider will perform a property appraisal to learn the market value, which will then be used to designate the loan amount for a specific house. An “LTV” or “loan to value calculation,” roughly around 80% or more of the property’s market value, is how the lender will determine the account’s cap.
That will mean basically, for a potential buyer interested in a property with an appraisal for $200,000 (market value) and a lender willing to provide a loan at perhaps 80%, you’ll receive $40,000 less than the appraisal making that the amount you would need to save for the down payment.
Offering 80% LTV is the low end of the scale. Some lenders will offer as much as 90%; it depends on the loan provider and the property. However, a typical down payment for a potential buyer is roughly 10-20% of the purchase price.
When you’re considering the idea of homeownership, it’s wise to start saving as early in life as possible in order to meet that price point or an understanding with a family member or loved one who plans to gift this to you.
Final Thought
These are the primary factors that lenders consider when looking at new applicants. A few other determining considerations can give the provider a bit more information to assuage the risk you could present. Click for details on how banks make lending decisions.
With employment, there needs to be some semblance of stability in the history without intermittent breaks, especially of extended duration. These can present red flags since history tends to repeat itself.
If you’ve been sporadic with employment to this point, that will be unlikely to change moving forward, creating a challenge for repaying loan installments.
Sometimes age will play a factor and the length of time you tend to reside in one location. If someone is constantly moving each year to a different place, it could speak to a person who will not sustain the life of their current home loan.
On a more positive note, if you have other business with the lender and these dealings are positive, they can present as a factor when assessing the home loan, especially if you’ve been a model consumer, paying on time consistently.
Because a lender presents a substantial loan, you need a more comprehensive image to back up what they learn with the primary three qualifiers to give their decision some added strength. It makes the lender feel more secure; you appear more solid.