Credit scores are an important parameter to map out an individual’s credit history and creditworthiness. They are used by almost all lenders globally to evaluate whether you will be a credit risk or not. But they are not the only factors that weigh in on a lender’s decision to accept a loan request or not and what terms to offer you. There are several other factors that lenders check before accepting your loan application, here are 6 of them-
1. Debt-to-Income Ratio
Your debt income ratio is the percentage of your monthly income that goes into debt repayments. In most cases, debt to income ratio needs to be less than 50%. However, with mortgages, it should be less than 43%. A high DTI portrays you as someone who’s heavily into debt and may pose a credit risk soon.
2. Employment History
Lenders often review your job history to assess the stability of your income. A solid employment track record, with two or more years at the same company, demonstrates your commitment and reduces the perceived risk of frequent job changes.
But if you have been job hopping, that could raise red flags for the lenders. They want assurance that you have a stable job and will be able to pay on time. Some lenders have additional requirements for self-employed individuals who are likely prone to income instability.
By law, lenders must evaluate your capacity to repay the debt you take on. Consequently, they aim to ensure that your income is sufficient to cover your monthly expenses as well as the new payments. While some lenders establish a minimum income threshold, this criterion is not always made public.
4. Credit history
Your credit score provides a quick glimpse of your overall credit health, but it doesn’t elaborate on much. Lenders will usually run a hard credit inquiry on your credit report to analyze your full credit history. To be more specific, lenders will check your credit history for missed repayments, collection accounts, bankruptcy and other signs that indicate that you are a credit risk.
5. Cash flow
When applying for a mortgage loan, lenders typically require you to disclose details about your cash flow, investments, savings, and other assets. This information is used to evaluate your financial well-being. Many lenders view your financial assets as indicators of responsible money management and income stability, which can increase your likelihood of loan approval, even if your credit score is average.
If you are applying for a secured loan like a mortgage or vehicle loan, lenders will consider the asset you are purchasing with the loan funds as collateral. Lenders usually have a limit on how much they are willing to finance for the asset’s market value. For example, home lenders may offer 95% of a property’s appraised value while for vehicle loans, you may be able to borrow money equal to 130% of your vehicle’s value.
Your chance of being approved for a loan depends on several factors, and it is important to each of them before applying for a loan. Consider the full scope of your financial circumstances against each of the factors before deciding anything. If you don’t have an ideal credit score or history, many online lenders will still offer you other favourable options.
If you have a bad credit score, don’t jump into options that sound easy like a payday loan to get the funds you need. Research lenders who will offer your bad credit loans with reasonable interest rates and terms. You will find that you have more options than you realize right now. We hope this helped understand the process behind a loan application getting accepted or rejected.