Loan Approval Factors

Several factors are considered by banks during the loan approval process.  Some banks have stricter loan requirements than others.  Once you have a better understanding of the factors that determine wheather you will be approved or denied then you can start to make sense of all the bank’s jargon.

When meeting with a loan officer you will be asked many questions and asked to provide different documents.  The loan officer may educate the customer on the different loans that the bank offers and have some idea for wheather someone would qualify.  Nevertheless, the loan officers main job is to collect information for the underwriter.  An underwriter evaluates the loan application and ulimately decides weather the loan is too “high risk”.  The risk factor is based on the banks policies as well as government regulations.

Without further a due lets get into some of the factors that go into the loan approval process.

Loan Amount

All the Different factors combined will decide the loan amount that the bank will approve you for.  Commercial real estate investments a lot of times will have minimum loan requirements.

Debt-To-Income Ratio

One of the main factors that the bank uses to decide affordability.  Debt-to-income ratio is a percentage based on how much monthly debt obligations you have in relation to your monthly income.

Credit Score

I would say most people already know what credit score is but for sake of being thorough.  Banks keep track of how trustworthy you are.  Credit scores are determine how big of a risk you are to lend money to.  The higher the credit score the lower risk you are.

Experience

Some banks offer specific loan products that offer benefits for investors.  In order to qualify for any type of loan that is used for investing, banks will want to know your experience level.  They will want to know if you have “skin in the game.”

Income

Your abilty to consistently pay back the loan is a big factor.  Lenders want to know how much your income is historically from a job.  They will want to see your W2 employment history over the years.  If you just left the job you was at for years for a new job it might be more difficult to qualify even if the job pays more.

Property Type

Sometimes lenders are picky on the types of properties they will loan for.  Some do commercial and some only some do residential only.  Banks a lot of times vary property type is allowed on government loans.  For instance, I know of a bank that will do single family FHA loans but won’t do small multifamily FHA loans.

Property Condition

Most conventional lenders want to know what the condition of the property incase the bank takes the property back as a foreclosure.  The bank wants to know if they can sell it to get some of their money back.  The most important factors when deciding on property condition is whether the property is in “livable condition.”  The property must have running water, electric, and funtional HVAC.  In addition it might concider a leaking roof, major structural issuses, and mold.  Pretty much anything that will affect the ability to sell.

Location

Location is so important because it is a major factor that decides the value of a property.  Types of loans like USDA for instance limit the location to only the rural locations displayed on their map.

Loan-To-Value

Lenders want a little bit of equity cushion from the start of the loan.  Usually the cushion is a LTV of 70-80%.  This means that if a property is worth $100,000 the bank will loan $70-$80k.

Assets

What you own and can use as collateral.  This could be cash reserves in the form of a savings account or how much money you have in the bank.  Also it could be stocks, bonds, cars, boats, or any real estate that you already own.  Anything that has value.

Recent Credit Transactions

A lot of people don’t think about this but if you get pre-approved for a mortgage and then you buy a new car.  It could very likely cause you to get denied for the mortgage loan.

Hopefully now you will have an idea of what these terms mean when you go to talk to a loan officer.  The more you talk with banks the more you will start to understand how the banks decide on loans and what your options are.

 

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