7 THINGS YOU SHOULD KNOW BEFORE YOU APPLY FOR YOUR FIRST LOAN
Applying for a mortgage loan can sometimes be stressful and confusing. With all the changes in the loan application process, you need organization. It is important that you are ready to make an offer as soon as you are offered a property that you like. If you do not have your loan applications prepared, you probably will not be able to close on time. Getting a loan today is more difficult than it used to be, but it doesn’t have to be that way. Before you apply, you need to do something. There are steps you can take to make things easier for you. By following these four steps, you will increase your chances of getting your loan approved:
1. Credit score and history
An applicant’s credit score is one of the most important factors a lender considers when evaluating a loan application. Credit scores range from 300 to 850 and are based on factors such as payment history, amount of outstanding debt and length of credit history. Many lenders require applicants to have a minimum score of around 600 to qualify, but some lenders will also extend credit to applicants with no credit history at all.
2. Income
Lenders impose income requirements on borrowers to ensure that they have the means to repay a new loan. Minimum income requirements vary depending on the lender. SoFi, for example, requires a minimum income of $45,000 per year, while Avant only requires a minimum income of $20,000 per year. However, don’t be surprised if your lender doesn’t specify a minimum income requirement. Many do not.
Proof of income can include recent tax returns, monthly bank statements, pay stubs and signed letters from employers; self-employed individuals can provide tax returns or bank deposits.
3. Debt-to-income ratio
The debt-to-income ratio (DTI) is expressed as a percentage and indicates the proportion of a borrower’s gross monthly income that is used to service the monthly debt. Lenders use the DTI to assess a potential borrower’s ability to make payments on new and current debt. For this reason, a DTI score of less than 36% is ideal, although some lenders will allow a highly qualified applicant a score of up to 50%.
4. Collateral
When you apply for a secured personal loan, your lender will require you to pledge valuable assets — or collateral. In the case of loans for houses or vehicles, the collateral is usually related to the actual purpose of the loan. However, secured personal loans can also be collateralized by other valuable assets, such as cash accounts, investment accounts, real estate and collectibles like coins or precious metals.
5. Execution fee
Although not part of the qualification process, many lenders charge borrowers a personal loan origination fee to cover the costs of processing applications, credit review and closing. These fees usually range from 1% to 8% of the total loan amount and depend on factors such as the applicant’s credit score and the loan amount. Some lenders collect the processing fees in cash at closing, while others finance them as part of the loan amount or deduct them from the total loan amount disbursed at closing.
What should you do if you are rejected?
A lender can reject your application for a personal loan for a number of reasons. Your credit score may be too low or your debt-to-income ratio too high. It is also possible that you have borrowed more money than the bank can repay based on factors such as income, employment stability and other outstanding debts.
If a lender rejects your application for a personal loan, there are some steps you can take to improve your chances of getting a loan in the future:
Ask for the exact reason why your application was denied
Check your loan application for errors or inaccuracies
Improve your credit score by paying off your current debts
Check your credit report for errors
Increase your income
Compare the requirements of lenders
Apply for a smaller loan amount
Consider a co-signer
Conclusion
Your credit score is one of the most important factors when it comes to whether or not you’ll be approved for a loan. So make sure you know what your monthly payments will be before you apply.
