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Lenders
Criteria For Sanctioning Loan |
When you apply for a loan , the lender consider some
points to know about your financial health, before
sanctioning the loan to you.
Here's a rundown of what a
lender looks at in potential home equity borrowers:
1.
Employment:
A lender will look at your employment as indicators of how likely you are to pay back your loan.
He can ask you for a proof of employment, that can be
the pay stubs and he will see whether your job is
permanent or not. Lenders look for steady employment with a single employer for the past two years (or at least employment in the same field).
2.
Source Of Income: Lenders will look at your
sources of income, so if you lost the job or fall into
illness or for what ever reasons, if you are going
into default on a loan, how can he get his payment.
Hence, they look at several things in relation to
earnings:
- Self-employment
income: Your net earnings i.e. gross income
minus business expenses and how many years the
business has been providing this income.
- Salary or wages
from a job: Lenders want to know how much you
make and how long you've been at your job, as well
as how long you have been working in your
particular field.
- Unearned income:
The annual amount and sources are important.
Secure pensions, high-rated bonds and other stable
sources are preferred.
3.
Credit History: Your credit report tells the lender
about your borrowing habits and how well you manage
your money and whether you've had any bankruptcies or
judgments. Bad credit -- such as late payments,
repossessions and delinquent accounts -- remains in
your credit history for seven years. Bankruptcy
remains on your record for 10 years. You should examine your credit
report before you apply for a loan.
4.
Stability: Lenders want to see stability, which means they will look closely any late payments during the last two years of your credit history. They will pay particular attention to any rent or mortgage payments that were over 30 days past due. They'll look at late payments for credit cards during the last six months.
5.
Purpose Of Taking The Loan: Although
prospective borrowers are not required to disclose why
they want an equity loan, lenders will usually ask and
it is one of the factors they consider because it can
help determine your ability to repay.
6.
Documentation: Be prepared to show your
lender proofs of income, such as tax returns and other
earnings statements. Borrowers who can't provide all
the necessary documents, may be denied credit or
charged a higher interest rate by the lenders.
7.
Debt-To-Income Ratio (DTI): Your debt to
income ratio (DTI) is a key indicator of your true
financial picture. It is definitely the lending
industry's measure of financial health. Your debt to
income ratio is calculated by dividing monthly minimum
debt payments (excluding mortgage or rent, utilities,
food, entertainment) by monthly gross income. This
formula will vary slightly from lender to lender. Some
include the mortgage but raise the acceptable ratios.
others do not. While variations will result in
different percentage outcomes, the overall concept is
the same, a debt to income ratio compares debt load to
income. Of
course, the lower the debt the better. Most people are
expected to have a debt-to-income ratio of somewhere
between 25 percent and 50 percent. When you hit 45
percent or more, you're living on the edge and a
lender is going to look twice. But if there are other
factors in your favor, such as high income, it's a
judgment call on the part of the borrower.
8.
Loan-To-Value Ratio (LTV): Your
loan-to-value ratio (LTV) shows your equity in the
property. Your equity is basically the amount of the
property you own, expressed as a monetary figure.
Another way of thinking of your equity is that it's
the amount of money you'd receive if you sold your
property at its valued price, less what you'd have to
return to your lender to repay the loan. Your LTV and
equity are crucial because common wisdom among lenders
is that the higher the LTV (and the lower the equity),
the higher the risk of a borrower defaulting on his or
her loan. Thus, low equity loans present lenders with
greater risk, forcing them to increase their costs.
Traditionally, LTV caps are 80 percent, but there are
lenders who will give out loans of 125 percent
loan-to-value -- which means they are letting you
borrow more than your house is worth.
So this is the criteria
lenders normally follow to sanction any loan. Always
give the accurate picture of your financial health
otherwise you will have to bear the penalties later
on.
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