When you apply for a loan, the lenders consider various factors before approving it. The loan underwriting, an important stage of loan approval, entails studying different aspects of the borrower’s credit and financial profile. The underwriters assess things like credit scores, debts, repayment history, income, employment, and more. Only after ascertaining that there is no risk of default, they approve the loan and the fund is disbursed to the borrower.
Let us carefully look at the most important determinates of loan underwriting, with a special focus on the most important one – credit score!
Major Factors Affecting Credit Score
The lenders ensure to check the following factors affecting loan approval.
1. Credit Score
To fulfill your loan requirements and easily secure funds from the lender, it is important for the borrowers to have a good credit score. If the lender checks your credit report and finds a decent credit score, then the chances of procuring a loan are hugely elevated.
The credit score reflects many things like how the borrower has repaid the credit dues in the past. If the borrower has an impeccable repayment history of credit cards and loans, they have a high chance of getting a loan approved. Also, if the credit usage is less and the borrower does not use more than 30% of the available credit, the chances of loan approval will be high.
Whether you have applied for other loans or credit is also evaluated. This generates too many hard inquiries and may compromise your score. The lenders favor the borrowers who do not have any negative marks on the credit report. If your credit report shows that you have been into bankruptcy or delinquency, it might lower your score and make loan approval a challenge.
Now that you know the relevance of credit score in loan underwriting, ensure to improve the same before applying for a loan.
2. Income Details
Another thing that the lender ensures to check is the borrowers’ income statements. If you have a consistent income with a considerable amount, according to the lenders’ minimum requirements, you can get a mortgage.
You might also need to show ITR or tax returns. Include bank statements in your document submission list. The lenders might check your bank statements to check the cash in the savings accounts and investments like stocks and bonds.
It may also interest you to know that the loan underwriters are more confident in providing the loans to the borrowers with assets. The underwriter thinks that they are less risky as they can make big downpayments or manage repayment in the cases of financial emergency.
So, when you apply for a loan, show that you have a stable income. You should also include additional income sources like investment income, part-time work, freelancing, etc. When the loan underwriter verifies the details of income and employment, they proceed to the next check.
3. Debt Ratio
The role of mortgage underwriter is also to checks how much debt you are carrying. They may calculate your debt-to-income ratio to find out whether you will have any difficulty with mortgage payments. The lenders calculate the same by combining all your ongoing debt accounts and dividing the result by the total income. If more than half of your income goes into paying the debts each month, you may not be a good candidate for loan approval.
To improve your chances of getting a loan, lower your debt and avoid applying for several debts. Also, find a way to pay some of your debt balances. Increasing your income can also turn things in your favor.
4. Downpayment
If you are taking a mortgage and can afford to pay a heavy down payment, the loan underwriter might approve your application quickly. When you pay a significant amount of money upfront, it decreases your monthly outstanding. The creditor will also understand that you have the capacity to pay a good downpayment and might manage to pay the remaining amount easily, too.
To increase the down payment, start saving for a few months before applying for a loan. Try to pay at least one-fifth of the total amount of the property as a down payment if you are planning to apply for a home loan. This kind of amount will make you look less riskier and you might also get low interest rates sanctioned.
5. Loan Product
One of the aspects of loan underwriting is what kind of loan you are applying for! Different loan products may ask for different specifications and criteria. Most mortgages need a good credit score for approval. Research and find the consideration list for your loan type.
Wrapping Up
Be mindful of these factors while applying for a loan. If you have everything in your favor from the above checklist, you will easily get a mortgage. Also, since your credit score affects loan underwriting the most and helps get you financial assistance, work to improve it. Check your free credit report from Due Factory and improve your credit score too!
FAQs
1. What is loan underwriting?
Ans. Loan underwriting is a process of assessing the credit health of the applicant. The loan underwriters check whether you are eligible for the credit.
2. What are the important factors in loan underwriting?
Ans. A loan underwriting checks the credit report, income and employment, liabilities or debts, loan type, and much more.
3. How do loan underwriters check credit history?
Ans. Mortgage underwriting includes a credit check of the borrower, where they check repayment history, debts, etc. with impeccable payment and a low debt usage, they can get loan approval.
4. Why is it important to have a stable job when applying for a loan?
Ans. Lenders check the employment and income details of the borrower to assess their credibility. An underwriting process checks whether the borrower has a steady income and can repay the mortgage as promised.
5. Is the debt-income ratio important in loan underwriting?
Ans. The debt ratio allows the underwriters to know whether the borrower has piled up more debt than they can pay. If the borrower has a low debt, then the chances of loan approval are high, and the borrower will have more income to pay the mortgage.