About Those Lenders

How Do Lenders Decide Loan Approval?

The Four "Cs" of Loan Approval

1. Capacity
2. Credit
3. Collateral
4. Character

Capacity

A lender will weigh your housing expenses and total debt against your monthly income to determine your ability to repay a loan.

Monthly Income - Your net monthly income. If you're self-employed or receive commissions or bonuses, the lender averages your monthly income over the last two years.

Housing Expenses - This is the monthly payment you'll have with the new loan, along with the monthly cost of insurance, property taxes and any homeowner's fees or other costs.

Total debt - Add up any current mortgages, credit card balances, child support or alimony payments, tuition, car loans or other installment loans that will take longer than 10 months to pay off and this is your total debt. If your monthly mortgage payment is less than 28% of your net monthly income, a lender will typically consider you qualified to repay the loan. That figure can even go as high as 36% depending on the buyer. For instance, many lenders will allow a first-time buyer's housing expenses to take up more of their income.

Credit

To find out what kind of credit risk you represent, your lender will investigate your:

• Previous mortgage payment history
• Rent payment history
• Credit card use
• Installment debt payment history

A few late payments on a credit card may not hurt you all that much. But collections, repossessions, foreclosures and bankruptcies can be serious problems. If you have a good explanation you may still be able to repair your credit rating and get approval.

Collateral

When you ask for a home loan, you're putting the home itself up as collateral. Naturally, the lender will want to know that the home is worth at least as much as the loan amount, which is why an inspection is required.

But they'll also want proof that you have the cash necessary for the down payment and closing costs. They'll seek verification of funds from sources including bank accounts, stocks, bonds, mutual funds, the sale of an existing property or any gifts from family members that will not have to be repaid.

Character

The way you conduct your financial transactions tells a lender a great deal about your fiscal character. If you take responsibility for your debts by paying your bills regularly and on-time, you will appear to have the integrity they're looking for in a borrower.

Other Compensating Factors

Many factors can sway a lender in your favor. The bottom line is that the lender wants to feel secure in loaning you money. Even if there are a few dings in your credit, if you appear to be a safe credit risk overall you should be confident your loan will be approved.

What Decisions Do Lenders Make?

There are three major decisions that a credit lender is empowered to make.

1. Loan Approval

Approval is often given with conditions, such as the sale of current property, that require documentation for final approval.

2. Loan Suspension

A loan is suspended when information is incomplete or questions remain unanswered in the loan application. The buyer must supply the needed information before a final decision can be made.

3. Loan Denial

There are a number of reasons why your loan may be denied, and you're entitled to know those reasons. If denial is based on your credit you're entitled to a free copy of that report.