Qualifying for a Loan – What Do Lenders Look For?
Loans are by the far the most common source of funding. Whether for purchasing a home, financing your business, paying off debts, or for college financing, we use loans. Before approaching a lender and applying for loan, it is best to understand first the factors that a lender will take into consideration when evaluating your position as a borrower.
1. Ability to Repay the Loan
First and foremost, when qualifying for a loan, the lender needs to assure that you are capable of repaying the money borrowed. Lenders want to see your cash flow and that’s primarily the reason why lenders tend to ask for tons of requirements such as proof of financial income. Your credit scores help them determine if you’ve paid off credit cards and other loans. Lenders check your credit scores to see if you’ve made your payments on time, and to see if you’ve defaulted on any creditors.
2. Credit History
As mentioned, the first thing that a lender will do to determine if an individual, couple, or business can qualify for a loan is to pull their credit report, usually from Experian, Equifax, Transunion, or another smaller credit bureau. Therefore, before you approach a lender or even start preparing to request a loan to see if you qualify for a loan, make sure your credit scores are as high as possible. It is best that you try to get a copy of your latest credit report from these three reliable credit bureaus. Carefully review the report and check if there are items or any errors that you find. For example, if you’ve gone through a divorce and a loan was placed in your spouse’s name, request that that item be removed from your report to not reflect the current history of that particular loan.
Qualifying for a loan can also be a matter of honesty, regardless of your credit scores. If you think your credit scores dropped due to a recent divorce, medical crisis, or because of loss of job, and those issues are already resolved, don’t worry because you can still easily qualify for a loan just by simply explaining those events to your potential lender.
Equity is the value of an ownership interest in property, including shareholders’ equity in a business. Lenders usually ask for this upon application for a loan, most especially, if the amount is large. To qualify for a loan, be prepared to offer equity, either with a down payment or collateral.
If your credit scores are high and you have never had any difficulties financial wise, then qualifying for a loan is as easy as pie! But, if you’ve been through some challenges or extreme financial problems, be prepared to offer explanation. It is best to seek a lender specializing in poor credit loans if our credit scores are too low for a conventional loan.
But, regardless of credit scores, see to it that the loan payments fit in your current budget. Once you fail to make payments on time, this may result to adverse marks on your credit reports, reducing your credit scores and making it difficult to obtain future loans.