Loan eligibility is a lender’s assessment of your ability to repay the loan. Your credit score and income are important factors in this assessment.
Lenders also consider your debt-to-income ratio when assessing loan eligibility. A high ratio indicates a risky borrower and can cause lenders to reject your application.
Borrowers with stable employment and income histories can qualify for conventional loans. These loans are typically backed by Fannie Mae and Freddie Mac.
Income
Whether you are applying for a new loan to buy a home or car or consolidate debt, lenders will scrutinize your income and credit profile. These factors will determine your eligibility and the terms of the loan you can get. The requirements vary by lender. Some may have minimum income requirements, while others will consider your age and financial history.
For borrowers, income can come in the form of cash or money-equivalents that they receive for work or as investments, or from rent of property and land. It can also include the return on assets and earnings from dividends on stocks, as well as the proceeds from sales of assets or property. It can also be in-kind income, such as food, clothing and shelter.
Lenders will usually look at the debt-to-income ratio of a borrower, which is the total amount of debt a person or business has compared to their annual income. If your debt-to-income ratio is too high, you may not qualify for a loan or will have to pay higher interest rates. Try to reduce your debt before applying for a loan, or find ways to increase your income.
The income requirements for personal loans differ by lender, but many require a stable income and a good track record. Some lenders will require tax returns, bank statements and pay stubs to establish your income. If you are self-employed, you can also provide your company’s profit and loss statement and balance sheets to prove your income.
Assets
There are several different types of assets that lenders may consider when reviewing your loan eligibility. These include physical or tangible assets like your primary residence, investment property and even livestock. These are items that you can physically touch and easily turn around and sell if needed to meet your monthly mortgage payments. There are also nonphysical assets that you can’t touch but that have value such as readily tradable bonds and stocks, pensions, 401(k)s, IRAs and royalties.
The most important assets that you need to report on your application are the ones that can be converted to cash immediately. This would include things like your checking, savings and money market accounts and the funds in vested retirement accounts (70% may be counted).
You can also consider fixed assets which take longer to convert to cash. These can include your 2nd homes, vehicles and any real estate that you own and might require a special set of circumstances to get access to or be forced into selling at a loss.
You will need to provide your lender with documentation proving the amount of these assets, including recent bank statements and verification that you are the owner of those accounts (or a trusted individual is listed as such). For certain programs, your lender will deplete a percentage of these fixed assets in order to verify your ability to repay the mortgage loan.
Debt
Debt is money that a person, business or government owes to another party. It typically comes with a contract noting repayment terms, including an interest rate and a minimum payment. People and businesses borrow to fund various purposes, including purchasing products and services, financing capital purchases, buying real estate, paying tuition fees and resolving emergencies.
Typically, lenders consider an applicant’s debt-to-income ratio when determining loan eligibility. This ratio is calculated by dividing the borrower’s recurring monthly debt payments by his gross monthly income. A low DTI may allow the borrower to qualify for a loan with competitive rates, while a high DTI could prevent him from qualifying for the best terms.
Some lenders offer specialized loan programs for real estate that focus on the property’s cash flow and income rather than the borrower’s personal financial situation. For example, a DSCR loan program evaluates the property’s ability to generate enough cash to service its debt obligations.
A lender also takes into account any nontraditional credit the borrower may have, such as a life insurance policy, individual retirement accounts, 401(k) assets, certificates of deposit, stocks or bonds. In these instances, the lender may require documentation of the asset to verify its value and establish whether it can serve as collateral for a loan. In addition, a lender may require that lease payments and other contingent liabilities be included in the borrower’s recurring monthly debt obligation calculation.
Credit
If you have good credit, you’re more likely to be approved for a loan with the most competitive rates. A high score indicates you are a low-risk borrower and that you will repay the loan on time. However, your credit score is only one of the factors that lenders consider when evaluating your application for a personal or home loan.
Lenders also consider your financial situation and the current debt you have, as well as your age. They want to know whether you are able to afford your monthly expenses and pay off the loan. A new loan would be added to your existing debt, increasing your debt-to-income ratio. This could impact your ability to qualify for a personal or home loan and may result in higher interest rates and terms.
You can improve your chances of qualifying for a loan by improving your credit score and reducing your debt-to-income ratio. To get started, set a goal to not spend more than you can afford to pay back when the bill is due. You can also build your credit by getting a small loan or a gas or department store card, and paying the bill on time every month. Adding a co-applicant, if allowed by the lender, can also help improve your eligibility as lenders look at the combined income and credit scores of both borrowers when determining approval.