When you submit an application for a loan, your information is reviewed by a team of underwriters whose job is to determine your overall creditworthiness. They look at several pieces of information in order to categorically decide how likely you are to make payments on the loan consistently and on time and how risky it is to lend to you. The factors most often considered in this type of evaluation are credit score, credit history, income, debt-to-income ratio and assets.
There are three credit bureaus: Experian, Equifax and TransUnion. Each of these three bureaus has information on your credit activity from individual credit cards to car loans and mortgages. Consequently, each of the bureaus maintains a score for you that is commonly referred to as a FICO score based on the name of the company that created the system of calculation. The score is calculated based on your payment history, your credit card balances, the types of credit you have and the length of your credit history. Scores range from 300 to 850, with average scores falling in the 600s. The higher your score, the more likely you are to get approved and the better your loan terms will be.
While your credit history is a factor in determining your credit score, many lenders will also consider your credit history independent of your numerical score. This can have a negative effect on your application or a positive one. For example, if you have a low credit score but your credit history does not show late payments, this mitigates the effect of your score. However, if you have a good credit score, an incident in your credit history such as a late payment or going over the limit on a credit card can have a negative impact on the underwriting process.
Outside of your financial information directly related to your credit score and history, your lender is likely to look at your income level. This helps the lender decide whether you are capable of making the loan payments required. In most cases, verification of your income will be requested. Acceptable forms of income verification include pay stubs, tax returns, W-2 forms, bank statements showing direct deposit of paychecks, or copies of paychecks.
Your debt-to-income ratio is a number expressed as a percentage that shows how much of your monthly income is spent on paying debt. As described by real estate website RIS Media, there are actually two ratios to pay attention to: your front-end DTI, and your back-end DTI. Both formulas are simple, and the lower the number you get, the better impact it has on your application. Front-end DTI is based only on your house payment. Divide the amount of your house payment by your gross monthly income, and you should get a decimal number that represents the percentage. For back-end DTI, which is based on all debt payments, divide your total monthly debt payments by your monthly income.
Your lender may also take your total assets into consideration, especially if you are applying for a mortgage. Analysis of your assets in this case could include an appraisal of your home to determine its value or could simply be determining the total amount of money you have in your bank accounts. The higher the value of your assets, the better it is for your application. Documents that may be asked for to verify assets include home appraisal, official verification of deposit from your bank or recent bank statements.
- Fair Isaac Corporation. "What is a Credit Score?" Accessed Oct. 11, 2020.
- VantageScore Solutions, LLC. "Who Uses Credit Scores?" Accessed Oct. 11, 2020.
- VantageScore Solutions, LLC. "Free Score Providers." Accessed Oct. 11, 2020.
- Fair Isaac Corporation. "What's In My FICO Scores?" Accessed Oct. 11, 2020.
Genevieve Adams has been a freelance writer since 2007 and is also regulatory compliance analyst for a community bank in the Pacific Northwest. Her work, covering primarily finance, crafting and fashion, appears on various websites. She has a Bachelor of Arts in theater from Clark Honors College at the University of Oregon.