Getting a mortgage can be stressful and confusing at times. With all the changes in the loan application process, you need organization. It is important to be ready to make an offer as soon as a property you like comes your way. If you do not have your loan items lined up, you will likely not be able to close in time. Getting a loan is more difficult than it has been in the past, but it doesn’t have to be that way. You need to do some work before you apply. There are steps you can take to make things much easier for you. Following these four steps will increase your chances at 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 like 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 lend to applicants without any credit history at all.
Lenders impose income requirements on borrowers to ensure they have the means to repay a new loan. Minimum income requirements vary by lender. For example, SoFi imposes a minimum salary requirement of $45,000 per year; Avant’s annual income minimum requirement is just $20,000. Don’t be surprised, however, if your lender doesn’t disclose minimum income requirements. Many don’t.
Evidence of income may include recent tax returns, monthly bank statements, pay stubs and signed letters from employers; self-employed applicants can provide tax returns or bank deposits.
3. Debt-to-income Ratio
Debt-to-income ratio (DTI) is expressed as a percentage and represents the portion of a borrower’s gross monthly income that goes toward her monthly debt service. Lenders use DTI to predict a prospective borrower’s ability to make payments on new and current debt. For that reason, a DTI less than 36% is ideal, though some lenders will approve a highly qualified applicant with a ratio up to 50%.
If you’re applying for a secured personal loan, your lender will require you to pledge valuable assets—or collateral. In the case of loans for homes or vehicles, the collateral is typically related to the underlying purpose of the loan. However, secured personal loans can also be collateralized by other valuable assets, including cash accounts, investment accounts, real estate and collectibles like coins or precious metals.
If you fall behind on your payments or default on your loan, the lender can repossess the collateral to recoup the remaining loan balance.
5. Origination Fee
Though not part of the qualification process, many lenders require borrowers to pay personal loan origination fees to cover the costs of processing applications, running credit checks and closing. These fees usually range between 1% and 8% of the total loan amount, depending on factors like the applicant’s credit score and loan amount. Some lenders collect origination fees as cash at closing, while others finance them as part of the loan amount or subtract them from the total loan amount disbursed at closing.
6. Keep documents handy
The biggest reason loan applicants don’t like the process is because they don’t have documents ready. If you know what you will need and know where to find it, the process isn’t that difficult. It is a good idea to create a folder or spreadsheet with all the items you need. Whatever you think you need, put it in the folder. Let your lender tell you what they need. Every day that you have to scramble to find a document you decrease your chances of closing. This could mean the difference in getting your offer accepted and missing out on a property you want. Have your credit report, bank statements and all income documentation available. Talk to a loan officer to find out if your situation is unique. The more items you have available, the easier the process is.
The loan process is as simple or difficult as you make it. If you expect the items you need in advance, everything will be much easier. Although the loan process is more difficult, lenders still ask for the same items. If you have not updated your pre-qualification letter in a while, you should do so. What you thought you could do in the past may not be the same today. By having these four items in place, you can close your loan in 30 days
7. Interest rates
Regardless of the type of loan you decide on, you need to pay attention to current interest rates. These will play an important role in deciding the total amount of the loan that must be paid back.
Since most banks and financial institutions are willing to compete for your business, it may be a good idea to shop around for the best possible interest rate. Just be sure that there are no hidden fees included in the rate, such as:
- Origination fees
- Appraisal fees
- Underwriting fees
- Administration fees
- Credit report fees
- Processing fees
Fees may not cause the interest rate to increase, but they will be included in your monthly payments. If this is the case, you might be better off choosing a loan with a slightly higher interest rate instead of paying a large amount in monthly or upfront fees.
What Should You Do If You’re Denied?
A lender can deny your personal loan application for a number of reasons. Your credit score may be too low or your DTI could be too high. It’s also possible that you asked to borrow more money than the bank thinks you can repay based on factors like income, employment stability and other outstanding debts.
If a lender denies your personal loan application, there are a few steps you can take to improve your chances of getting a loan in the future:
- Ask for the specific reason your application was rejected
- Review your loan application for mistakes or inaccuracies
- Improve your credit score by paying down your current outstanding debts
- Check for mistakes on your credit report
- Increase your income
- Compare lender requirements
- Apply for a smaller loan amount
- Consider using a co-signer
Your credit score is one of the most important factors in determining whether or not you’ll be approved for a loan, so make sure you know what your monthly payments will be before you apply.
Shop around for the best interest rates, and be prepared to provide documentation of your income and assets when applying for a loan.