By Ericka Gorman
Whether you’re buying a house, financing a car purchase or simply applying for a credit card, there’s more to your loan application than your credit score. While your credit score is a big factor, there are three key things lenders consider as well, including:
How responsible you are with credit
Lenders really want to know one thing: Are they going to get their money back? To figure this out, they’ll look at your payment history, your debt-to-income ratio and the length of your credit history.
When a lender reviews your payment history, they’re checking to make sure you’ve made all of your payments, and in a timely fashion. While they’ll likely look at your entire payment history (whatever’s available on your credit report, anyway), your most recent payment history will be weighted more heavily. If you made a few late payments three years ago but have paid on time since then, a lender might overlook it. But, if you regularly made on-time payments and have recently been late, a lender may be hesitant to extend you credit in case this new trend continues.
Your debt-to-income ratio is just what it sounds like — the amount of debt you are paying back compared to the money you bring in. If you’re already carrying a lot of debt and applying for even more, a lender might worry about your ability to repay your new debt and decide not to give you a loan. The ideal debt-to-income ratio can vary, but in general it’s good to aim for total debt (including your new loan) that’s below 36 percent of your income.
The length of your credit history shows how much “experience” you have with credit, with a longer history working in your favor. To calculate this, some lenders look at the average length of all of your credit accounts, while others look at the age of your oldest account. It’s a good idea to avoid opening or closing any credit accounts before you apply for a loan, as new accounts can shorten the average age of your credit history and lessen your chances of getting your loan. And, lenders may wonder why you suddenly need a bunch of new credit lines.
How much “skin” you have in the game
Mortgages, auto loans and other non-credit card loans almost always require a down payment, even if you have a stellar credit history. To make yourself look even better to a lender, put up a larger down payment — especially if you have some blemishes on your credit report. The more money you have on the line, the likelier it is that you’ll repay your loan. After all, who wants to lose their $50,000 down payment by walking away from their mortgage? As a note, the lender may also require a larger down payment, depending on the state of your credit report.
How stable your long-term financial picture looks
Lenders are also interested in your employment history. While this isn’t in your credit report and doesn’t affect your credit score, it does provide lenders with a full picture of your financial health.
When you apply for a big-ticket loan like a mortgage, your lender will verify your employment — sometimes more than once, first at the beginning of the process and then again right before closing — and may ask how likely it is that your tenure will continue. The more stable your employment, the more likely it is that you’ll be able to repay your loan.
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Tips to remember before you apply for a loan
Before filling out any paperwork, do a financial check-up on yourself. Pull your credit report (you’re entitled to one free credit report per credit reporting bureau each year through AnnualCreditReport.com) and review it for any errors or omissions. Follow up with your creditors and the credit reporting agency that’s reporting the error if there’s any misinformation. Also, be sure that the new loan doesn’t strain your budget, and consider making a smaller purchase — or foregoing the purchase for a while — if it does. Finally, be sure to notify your employer that someone will be calling to verify your employment. That way, they might respond more quickly to the lender’s request.
Ericka Gorman is the Senior Manager of Credit Product Strategy for Alliant Credit Union, one of the largest credit unions in the U.S. With over 15 years of experience in financial services, she has a diverse background that includes operations, project management, technology and product management.