You may be surprised to learn that lenders review more than just your credit score before making a decision. There’s a lot more that goes into a loan application review. It’s not just about having excellent credit, although that will get you halfway there. Below are two of the major factors that lenders look to when making a loan decision.
Credit Score
With your school days behind you, you may have thought that those annoying grades would vanish too. Not so! As an adult, your most important “grade” is your credit score. The higher your score the better, and the more likely you are to obtain a loan with a low interest rate. Typically, anything over a 680 is considered good, while anything over 800 is exceptional, and shows lenders that you are a low risk borrower.
To calculate your credit score, the major credit bureaus (Equifax, Experian, and TransUnion) use a scoring model that includes the following:
- Number of accounts
- Types of accounts (revolving, closed-end loans, mortgages, etc.)
- Available credit vs. credit limit
- Length of credit history
- Payment history
Credit scores can fluctuate monthly based on your spending, borrowing, and payback history. If you recently applied for a loan, a store credit card, or even had your credit checked for a new apartment, you may see a slight dip in your score. Each year, you’re entitled to a free copy of your credit report from each of the major credit bureaus. Because they each use slightly different scoring models, you may notice slight variations in score between companies.
TIP: If you have a checking account or an open loan (excludes mortgages) with us, you can view your FICO® Score for free within Internet Banking and Mobile Banking. In addition to the score itself, you’ll also be given the key factors that impact your score.
Debt-to-Income Ratio
An often overlooked factor used in credit decisions is your Debt-to-Income (DTI) ratio, a fancy way of saying the percentage of your gross income that is applied to your debt each month. The lower your DTI, the more likely you are to obtain a big loan, especially a mortgage.
To calculate your DTI, take your total monthly debt payments (mortgage, loans, lines of credit, child support, etc.) and divide that number by your monthly gross income (your monthly salary before taxes and other deductions). Multiply this number by 100 to get your ratio or percentage.
Lenders like to see a low percentage, which shows only about a third of your monthly gross income is allocated towards paying off debt. A good way to lower your DTI is to pay down debt and then keep it low – that will also give your credit score a nice boost!
Overall, if you’re looking for the best way to get approved for the loan you want, make sure to keep your credit score high and your DTI low. For more information about credit scores, debt management, and more, visit hvfcu.balancepro.org.