When you apply for most personal loans, the main factors taken into account are not just credit, but other major factors are income, length & type of employment & amount requested. Each institution you apply with will….. has the right to assign different levels of importance to any of these, or any other characteristics, but most companies look at these factors. Generally, you will be applying at Non Government Institutions. Since these are private institutions, other than basic factors like race, religion, sex, etc, each company can and will set their own guidelines.

There are 3 major credit reporting agencies in the US, Equifax, Experian, & Transunion.

When you apply for a consumer or even a business loan, the consumer bureau that is used will often be based on what region of the country you live in. If you live in the Eastern & Southeastern United States, Equifax will often be used, Experian for the Midsouth and West, and Transunion for the Midwest. Although all are full national bureaus, each bureau tends to be strongest in those regions and will have the most complete file.

All three bureaus are not mirrors of one another. There may be both good or bad tradelines in one or two bureaus, that are not reported in the others. Some companies that you are applying with will use what’s called a “Tri-Merge”. In a Tri-Merge report, the company you have applied with will see a combined file so that every trade line will be seen. They will also see the credit score you received on each bureau. If one of the scores at one bureau is considerably lower than the score at the other two bureaus, this may influence their decision.

The credit score, which may also be called “Fico Score”, or “Beacon Score”, or “Empirica Score” is a risk score assigned to you. Many companies consider a number of primary and secondary factors about your bureau to determine if your risk level is acceptable. for their standards, but the bureau score is the single most important factor.

Since most companies you apply at will be private institutions, it is at their discretion who will be approved for a loan. What Company A decides is acceptable may not be acceptable to company B. Other important bureau factors include Time in File, high credit, number of Tradelines, number of recent inquiries, total credit card balances, unsecured account balances as a percentage of limits, and derogatory reportings. All of these affect that final credit bureau score.

If you have been approved, great! If you were declined, get a copy of your credit report to see what is on the report. The credit report you receive will probably have a different format than the ones used by companies you have applied at. It will be less technical, will rely more on words than on numbers, and may not have a credit score.

Many large companies will “Auto Decision” your application, meaning a computer will decide if you get the loan or not. Another technique is for the computer to auto decline the applications that are below an absolute low standard and auto approve those with score and characteristics so high that the institution is comfortable granting credit without a person even looking at your application. This means you may be declined by a computer. The applications in between are often sent to a credit person for review.

In many smaller companies, an individual will review every request. Statistics prove that over time, as far as the overall default rate, better decisions are made by the computer risk models. These computer risk models are developed in-house by some large companies, or purchased from outside vendors. Tens of thousands of real applications and their performance over a period of years are assessed in order to create these computer credit risk models and to assign risk levels and scores. They are applied to new applications since prior performance is the best indicator of future performance.

However, mistakes are made.

Example:

When a credit card issuer sets a cap on the amount of unsecured revolving credit they are willing to have any one applicant have (Credit Cards, Lines of Credit). If an applicant is above that threshold, they will be declined. On credit reports, credit cards and lines of credit will be listed on an account as an “R”, for revolving. Many homeowners have an equity line of credit with a high limit which unfortunately, the credit agencies may report as an “R” and incorrectly lump these lines together with credit cards and lines of credit when reporting your total unsecured credit. This error may also be caused by a companies risk evaluation models. This may cause you to incorrectly exceed their maximum and be declined. The credit bureaus may also list this as unsecured credit available, which may slightly lower your score more than if they had correctly listed it as a secured line.

Example:

John Smith has 5 Credit Card for limits for $ 25,000

John also has a home equity line for $50,000

These two are lumped together and now you are shown as having $75,000 in unsecured credit, which some credit grantors may consider too much.

CREDIT INQUIRIES

Each time your credit file is inquired on, your credit score drops a few points for a relatively short amount of time.    If you have too many inquires in too short of a time, it can dramatically. lower your short term credit score.     If you have 5 or more inquiries in a 30 day span, it begins to significantly impact your score.    Go ahead and apply for what you need.  The key is to simply be aware of this, and to avoid applying recklessly rather than to avoid applying altogether.  Cable hookups, department stores, automobile shopping, apartments, all count as inquiries and can lower your score. Most Banks will also now check your credit when you open a new account.

Many, but not all companies have begun to screen auto dealer and mortgage inquires out of what they consider inquiries since they know you are shopping for a deal rather than trying to debt pyramid.   

Time in File

The date your first “loan” of any kind, including any type of credit card was established.   The older this date is the better and will lower the affect current derogatories will have on. your credit score.    The more accounts you have that you have never been late on, and the longer you have had them will mean that if you have a 30 day late, it will not affect your score nearly as much as if your time in file is short.    A 30 day late will lower the score of an average 25 year old much more than it will lower the score of the average 45 year old.

In essence, you have built up a “store” of good credit.    It is imperative if you are young, not to allow anything to show up as late on your credit.    It will only make it that much harder for you down the road.    A longer time in file will also lower the affect that charge offs, and unpaid accounts will have.     Instead of having catastrophic affects on your credit score, it will be significant. 

High Credit

The higher this figure is in your credit file, the more likely it will be for you to get approved for a loan request.

Example:   If you are applying for a $20,000 credit card, even with good credit, good income and a credit score of over 700, if your credit file’s highest credit card has a $2,000 limit, it is doubtful you will be approved for a $20,0000 limit simply because you do not have comparable credit.   The lender will feel that you have show excellent responsibility with $2,000, but you have not shown that you will satisfactorily handle a much larger loan.  If you took out a car loan that had a much higher balance, it will help, but the lender may still look to see what is the highest credit card limit you have and make their decision about the limit based primarily on that.  

Number of Tradelines

The number of Tradelines you have can have either a positive or negative affect on your credit bureau. A trade line is any type of loan, credit card, line of credit or mortgage that shows up on your credit file.    The more of these that you have always paid on time on, in general, the stronger your credit file is and the higher your credit score will be.

Exceptions to this are:

Ř      If you have significant balances on many accounts

Ř      If you have many credit cards, even without balances on all.   This will drive up your total unsecured credit available, which the credit bureaus consider in determining your credit score.

Ř      If you have opened up a high number of accounts in the most recent 60 days, a potential lender reviewing your credit report may be alarmed at the number of new accounts you have opened and will be worried that you haven’t had enough time to show how you will be able to handle the new accounts.    You will be considered a higher risk.

JOINT DEBTS

If you are married and most of your debts are joint and your spouse has an income, you should strongly consider submitting a joint application. Otherwise you are trying to get a credit approval based on your total debt but less than your total income.

If you could easily cover all your household debts yourself and have money left over at the end of the month, you probably can apply on your own. If you need your spouse’s income to cover your monthly debts, you likely need to submit a joint application.

Debt to Income Ratio

Many lenders will use the information you provided on your application about your income and the information on your credit file to calculate a Debt to Income Ratio. Those that do take what appear to be your fixed monthly payments (Mortgage, car, minimum payments on loans, etc., and divide it by your monthly income. If the ratio exceeds a certain percent, some institutions may decline you. If you have more than one household income, you should strongly consider making a joint application since you don’t want the lender to consider your request based solely on your income but all of your household debts.

Credit Card Balances, Limits, Usage & how to keep your scores high

Many people think you have to carry balances on credit cards and loans in order for it to be considered as “having credit”. Not so. You simply need to keep it active. The best scenario is to have one or two high limits on a couple of credit card accounts to show potential future creditors that other people have deemed you “worthy” of that amount, but not to run them up too much & make the lenders think you need credit badly. Ideally use each credit card you have at least once every month, charging any amount and then pay it off so the account will report the current month to the credit bureau which shows the account active rather than dormant. This tells people you use it but don’t need it.

If you carry balances, creditors and credit agencies have risk “triggers” for which they will classify you as a higher risk and dramatically lower your credit score and increase your possibility of being declined for personal loans and small business loans. If you carry balances 20%, 50% & 75% or higher of your total limits, these are threshold limits for many companies. The percentages and how they are interpreted will vary slightly, but what’s important is that overall, these are considered elevated risk levels. A person with a $2,000 credit card and a $1,900 balance will be penalized more in the usage category than a person with $50,000 in limits and $30,000 in balances.

The person with $30,000 in balances may get hit for having a higher total, but they will get an advantage in percentage of limit usage.

If you have 75% or higher usage and are about to apply for an important loan, one short term trick to improve your score is to, believe it or not, get another credit card so that your percent usage goes down. This is feasible and works better in the $5K to $25K range. Someone with $10,000 in limits and a $5,000 balance is going to have a lower usage percentage and look better than a person with $5,000 in limits and $5,000 in balances, even though they owe the same amount.

A better solution would be to simply make a large payment on a card, even if it from a savings account. After you get the loan, you can “repay” your savings account if it was on a credit card or line of credit. This will not work with a regular installment loan.

Disputes

Many people will at some point have a dispute with a lender, creditor, or retailer regarding a loan or purchase they made and will consider not paying amounts owed because they feel they were not given what was promised. Not paying will probably hurt you more than it will help you.

It’s happened to most of us. We bought something that didn’t work right, we were charged something we felt we shouldn’t have to pay and so we don’t. Even though we are right, it will very likely help us more by paying rather than not paying.

If you have a dispute and you don’t pay the disputed amount, the other party may report this item as unpaid on your credit report. In many cases, disputes are less than $500. If you think you will probably take out large loans in the future such as a mortgage loan, car loan, or business loan, you will likely be saving money, be more likely to get approved, and make your life easier by paying the disputed item.

Example:

Britney Borrower receives a bill from a recent hospital visit and there is a charge of $300 for an additional X-Ray she didn’t realize was considered an additional X-Ray, wasn’t told about it, and so Britney refuses to pay. After 120 days trying to collect from Britney, the Hospital charges off the account and reports it to the credit bureaus as a charge off. The charge off reports on Britney’s credit file beginning in July. As a result, Britney’s credit score drops from 655 to 605.

In August Britney decides it is time to buy a home. She goes to her bank who promptly declines her for a loan. She finds out she is declined by her bank due to “derogatory credit” and because her credit score is too low (The lender’s cutoff is 630)

Britney then goes to an alternative lender who approves her for her $200,000 mortgage, but due to her recent derogatory credit and low credit bureau score, is setting her rate at 8% instead of the 6% on a 30 year note she would have gotten with a 655 bureau score. If Britney pays off the entire loan, she will pay $80,000 more in interest over the 30 years because of the $300 X-Ray bill she didn’t pay. Britney didn’t save $300, Britney spent $79,700 more. Of course she was in the right, but being in the right doesn’t always put you in the best position. Britney’s score may go up and she may refinance, but that will take time, and interest rates may go up in the meantime, when she could have locked in at a low rate.

There are many other examples, but it is generally better to pay a disputed bill because it will cost you more in interest on higher rate loans than the amount in dispute.

APPROVED OR DECLINED

So you have applied and you get a response. When you apply for any loan, be sure to thoroughly complete the application. Some companies, in addition to reviewing your credit, will assign you an internal application score. You get this score by getting, or losing “points” based on information you listed on your application. If you are asked for a bank reference but didn’t bring that information with you, get that information, then submit your application. Do not submit with missing information. You may very well lose “points” which could be the difference between an approval and a decline.

Let’s say you are well off and you have a Money Market Account, Certificate of Deposit, or even an IRA with a good balance, ask a Loan Officer if providing that information will help the application. Sometimes it will. Basically, companies are trying to see if you have not only the willingness to repay based on your report, but the capacity to repay based on your assets. Capacity is assessed by your cash flow, back up cash and assets. If you can show that you have a large back up, some companies will consider this. Willingness to repay is mostly determined by your credit bureau. Any slow pays may have been out of your control, but they will be taken as is.

Additional Information

Once you have applied, if you are contacted for additional information, supply as much requested as possible. You may not have supplied enough information and your application may be at a standstill until this is provided. Sometimes, your application is “declined as is” but it is a borderline case and the loan officer wants to get something from you to strengthen your application, which may make an approval out of it.

Approved.

You have been approved. If you wanted more than what you got, ask for more. Very often, the amount you received is not the maximum and sometimes, you can get a 10% to 15% increase without another credit review automatically, just by asking!

Individual Guarantee Most Loans require what is often referred to as an individual Guarantor or signer. Sometimes the institution says that you are required to “sign on it”. This means more than you are just signing to acknowledge or agree to the terms. It means that you are legally agreeing to personally guarantee the loan, which gives the institution the right to sue you for payment in the event you cannot pay. This could include their ability to garnish your wages, place liens on your home, etc. What the company can do will vary from contract to contract, but it gives them great power over you. Most of the time you have no choice but to sign, otherwise the loan would not have been approved. You should simply be aware of this and be prepared that severe negative consequences to you are real and can easily take place if you default or are severely delinquent.

Co-Signers

If you are co-signing to “help” someone else get a loan, you are just as responsible for that loan as the person you are helping get the loan for. Many people get derogatory items reporting on their credit report on loans they co-signed on because.

After they co-signed on the loan, they considered themselves to be done with the transaction and they forget about it. They also don’t keep track of how the person they co-signed for is paying on the loan. Most companies don’t send the co-signer notices of when the payments are due or notices that the payments are late. It isn’t until the loan is severely delinquent or in default status that the co-signer is contacted for payment. By then it has negatively affected your credit in a major way and it is too late.

If you co-sign any personal loans or business loans for anyone, make sure you feel they will really repay. Keep track of the loan and have the lender send you notices of payments due and immediately notify you or contact you if the payments are delinquent. Most importantly, be prepared, as you promised with your signature, to pay in the event the primary borrower doesn’t.

DECLINED

You have been declined for a personal loan request . There are several strategies you can take.

Credit Decline

If you were declined based on your credit report you should immediately get a copy of your credit report. After you receive the report.

Determine what is it that’s derogatory on your report. Is it accurate? If so, there really isn’t much you can do about it on the credit report. Then all the lender who declined you. Ask the following:

1. Were you Auto Declined by their computer or did an actual person review the application?
    

2. If you were declined by a computer or even by an actual person, find out who has the authority to re-review and approve the application. Tell them you want it to be re-reviewed by that person and you want to speak to them. If they are unavailable, get the name and phone number of the person who has the authority to re-consider it and approve it and leave a message for them to call you back.

It is very possible, depending on the size of the company and what you have applied for that you may be told that you have to wait 6 months to be re-evaluated or that it is against their policy and cannot be re-evaluated. In almost all cases, if not all, the company can re-review your application if they want to. If you are told something like this, it is only a first line employee telling you guideline procedures. There will almost always be someone who has the power to re-evaluate your application and that’s what you want them to do. Don’t think you are being too pushy, you can be sure there are others doing this very thing.

Once you speak with that person, don’t complain, give them information that they feel they could use to justify approving the application. Most of the time, they want to try to approve you if they can. Then ask them what it would take for your application to be approved. If they reverse the decision, great, if not, follow their advice on what it would take to get approved or put you in the best position to get your loan request approved.

Was there one specific thing that was predominant in the decline? How close were to you an approval? Find out these details. You need to know where you stand so you’ll know what to do to get approved next time.

What do you do now? You still need that loan. Now you know exactly what your credit looks like. Find another viable lender. But don’t just start filling out loan application. Do the following:

Call them, ask to speak with a credit officer. Tell them what you type of loan you want, the amount, etc..

Ask them what factors they look at in decisioning those loans. Then tell them your income, what your credit bureau score is and roughly what your monthly totals are for fixed debt or anything else that would play a major role in approving that loan.

Try to get them to tell you if they think you have a good chance of getting approved. They may be reluctant to do this, but if you push an actual loan officer, they will probably give you a good idea. You are in essence, trying to use what you now know about your credit to do a verbal before you actually apply. This is important. You have already been declined once, you don’t want to be unnecessarily be turned down for the same thing again or any other reasons that you can avoid by talking with the lenders first, if possible.

If you are dealing with a credit card issuer, the way to handle this is to call the customer service number and ask to speak with a supervisor.

Credit Doctors / Bureau Cleaning Services

Some people have tried in recent years to get Credit Doctors to clean up their credit. This has certain Drawbacks associated with it.

Most of these companies rely on existing rules to help you clean up your credit. If one of your creditors reports a derogatory item on your credit report, there are rules to the effect that if you contact the credit agency and dispute that reporting, the credit agencies have a limited number of days to contact that creditor and ask for a verification of that reporting. If that company fails to reply on time, the credit bureau may have no choice but to delete that derogatory record from your file.

These credit doctors will bombard the credit bureaus with a volume of these request which the credit agencies and the companies reporting you delinquent cannot keep up and the credit agencies will be forced to remove the derogatory reporting from your file. Sometimes these derogatories will re-appear on your credit file again later and in other cases some will not come off because the contact information for that creditor is no longer valid. So if you have a lot of things wrong on your file, this may not work.

Chances are, it will not work for all of the tradelines reporting and it will remove most of them but not all of them. When it comes to your credit report, even one or two very derogatory reportings will do most of the damage to your credit score.

Divorce

In a divorce, both parties separate debts and believe they are not responsible for any previous joint debts they have not agreed to pay. This will often result in credit problems….more

Any joint loans, be they personal loans or business loans that a couple entered into with a lender while they were married will continue to be joint debts after the couple divorces regardless of what the husband, wife, attorneys or court orders.

When the couple entered into a joint loan with the lender, the lender approved that loan based on the information of both the husband and wife. Their contract, as agreed upon by the couple, is with the husband and wife together. If there is a divorce, the couple cannot just split up the debts as they see fit or have an attorney or even the judge of a divorce court decide how the loans will be split up.

The lenders have to agree to any separation of debt and they have every right to refuse to. The contact was between you, your spouse and that company, not anyone else. It is a legally binding contract, therefore, 3rd parties have no legal authority to alter it afterwards. For the lender to convert any existing debt from joint to individual is a completely new credit decision. They may decide that the income of one of the parties is not enough to support the debt that was approved jointly before, or there may be many other legitimate reasons that the lender felt strongly enough to make the loan together, but would not have made the loan if one of the people had applied individually.

Contact the lender directly and find out what their policies are for a divorce situation. If they tell you you must re-apply, do so. If they will not approve you, you can take another loan out elsewhere and pay out the existing loan and close the account.

If you end up leaving it joint but your spouse agrees they will pay it themselves, keep track of the debt to make sure your spouse is paying on time. Get the institution to send a copy to your address if possible. If your name is on the account, it will damage your standing with that company if the account goes past due, and it will damage your credit if the account goes 30 days Past Due

New Social Security Numbers

Some people who have had major credit problems have gotten a new social security number being told this will be a “clean slate” wrong move.

This is only part of the story. It’s the rest that could be your nightmare. When you are issued “a new” Social Security Number from a company, it could be that SSN has been stolen from the Social Security Administration, meaning it is a number that they intended to give to someone else in the future. That might work in the short term, but if the Social Security Administration finds out, you may be contacted. It will not be a pleasant or short experience.

Even though you have gotten a “new” SSN, once you apply for personal loans or small business loans, your old SSN will almost certainly ALSO pop up as another SSN. This is a major red flag to lenders. They realize there are a variety of explanations for this, none of which are good. They will think either:

1) You are a fraudulent applicant and decline you
2) You have stolen a social security number and are trying to start a new identity.

3) They will probably not think you have a son or daughter with the same name as you (The best scenario) Since this “new” SSN will have a more recent issue date than your true one, it may not be old enough to obtain credit. If it is, your true SSN issue date better be at least 15 years older than the issue date of your adopted SSN. In all likelihood, this will not work even in the best of circumstances. You will create more problems than you have solved. Do not do this.

DIFFERENT TYPES OF PERSONAL LOANS

Major Financial Institutions often do not have 1 single credit criteria for customers for car loans, personal loans, unsecured loans, or small business loans throughout the bank. They may have different credit criteria for the Branches, Credit Card Divisions, Automotive Sales Finance Division and Mortgage Division, even though it is the same Institutions. Thought things would be the same at bare minimum at the same company? Not so by a long shot.

Car Loans

Car Loans are currently about the easiest type of loan to be approved for. Programs for car loans are the most aggressive credit wise and among the most aggressively marketed due to the affiliation of auto manufacturers, auto dealers, and financial institutions.

If you are trying to get a car loan from a major bank at one of their branch offices, it can be more difficult to get approved, take longer, and the rate may even be higher. At a Branch, either a loan officer makes the decision or a central area for the Branches makes the decision.

Most banks also have an additional and separate Sales Finance Division of the, whose entire purpose it is to also make car loans. These Sales Finance Divisions are set up mostly to establish and promote a business relationship with many Car dealerships throughout the country which the branches don’t do. Due to the intense competition at dealerships, there is intense pressure to get people approved to make the sale. Each Dealership sales agent has dozens of financial institutions they can send a car loan request to, including the finance Divisions of the car manufacturers themselves, with whom it is easier to get approved and they often have better rates. Banks know this, so they have to match the credit standards and rates and endup offering lower rates than what the local branch of the same bank is offering.

The result is that the credit criteria of the Sales Finance Division at a bank is easier to get approved from and the rates are often better than the rates of a branch office at the same bank!

Many banks don’t like to re-finance car loans on 1 or 2 year old cars for the amount that will be required to pay off the loan where you have your car loan with now & they also don’t like to re-finance for as many months as you had remaining with the other company. Basically, they don’t like to “swap out” the loan. Therefore, make sure you are satisfied with the rate when you take out a car loan and don’t plan on re-financing your car loan.

In the first part of the loan, the car depreciates the fastest and the loan balance goes down the slowest since most of the payment is interest. So after 1 or 2 years when you go to refinance, a car that you bought and financed for $20,000 now only has a book for $15,000 but your loan balance may still be$18,500. Finance companies call that “upside down”. They don’t want to finance something for $18,500 that now only has a retail value of $15,000. They may want you to come up with $3,500 in order to re-finance because they aren’t likely to make you an $18,500 loan on a car with a retail of $15,000. They also know that even if they finance your car loan at the current retail value, if you default, they will send the car to auction and only get around 50% of whatever you still owe on it. They know they are going to lose no matter what if you default, so they don’t want to risk more by financing you over the retail value.

A sharp person will point out that after 1 or 2 years, lenders are “upside down” on every new car loan they’ve made. Meaning, had they financed you to begin with instead of another bank, that same car loan with a loan balance of $18,500 and a car retail value of $15,000 would have started off on their books instead of at another bank. So what’s the difference? Nothing, but they don’t see that opportunity. All they see is that you want to re-finance a loan they will have to finance for more than 100% of the car’s value to pay it out and they don’t like to do it.

Once you have made a decision to go to your Bank’s branch office for a car loan, the Loan Officer is not showing you competitive or lower rates offered by GMAC, Ford Motor Credit, etc, like the Salesman at the Dealership is to his customers. So the banks process your loan with a higher rate and tighter credit standards. This part of the bank is known at the “Retail” part of the bank and it often has different criteria for personal loans and small business loans than other parts of the bank.

Unsecured Loans

These are among the most difficult to get. Better credit is required. Often, your personal credit score needs to be 680 or higher, and the higher the better. The Bank may have different criteria for Unsecured loans in different divisions within the bank. The amount you will get approved for depends greatly on your income.

Some institutions will ask you to complete a Personal Financial Statement if you want to get a higher limit, often over $10K. They will take a look at your Liquidity (How much cash type of assets you have) and Net Worth. They may take a percentage of each and use that as a guide to set the limit you get. Some institutions may take a different approach, but if they are looking at a Personal Financial Statement, it will be similar.

Let’s look at an example:

John Smith is approved from his local branch of Bank U.S.A. For an unsecured line of credit for $5,000. It is not enough and John asks for an increase, but is denied because, he is told, they have approved him for the max.

A week later, a representative from Bank USA’s Credit Card Division out of Florida calls him and tells him he is pre-approved for a credit card up to $12,000. He applies, and is approved for $10,000.

This happens all the time. It is the same bank and both are unsecured credit. The Bank now is at risk with Joe for $15,000 total unsecured credit exposure. It should not make any difference which part of the bank gave Joe the credit. After all, if Joe runs in to hard times and can’t pay, it’s the same bank that suffers overall. That is true but the bank doesn’t handle it that way for several reasons

The division that decides on unsecured personal lines of credit is a different division than the credit card division, which is a different division than the Sales Finance Car Loan Division. Each has different credit criteria. If the unsecured line of credit division grants you $5,000 Maximum and then the Credit Card Division grants you $10,000, the credit card division will NOT say “Oops, we see you have reached the total maximum unsecured credit with our institution, so we can’t give you a credit card”. They don’t care that you already have unsecured credit with another part of the bank.

In contrast, the unsecured division will not say “because the credit card division is willing to give you $10,000 unsecured, you can choose to just increase your line with us to $15,000”. They won’t. Each department has a different threshold per person. They often act like separate horses with blinders on. Each considers themselves a Business Unit within the bank. Each has different Presidents, different goals, different credit criteria, different marketing plans.

Second Mortgages

Second Mortgages are very desirable types of loans to get. You will get a tax advantage and most companies prefer these types of loans above all others.

Most lenders would much rather do a Mortgage Loan or Second Mortgage over a personal loan, unsecured loan or small business loan. The reason is that your home is one of the best types of collateral there is. They would rather take a Certificate of Deposit for an equal dollar amount of the loan, but many more people have homes they can use as collateral.

You will need to know how high of a LTV (Loan to Value) the lender will do. The higher the LTV, the better. If a lender says they will do 90% LTV, the following is an example:

Sally Smith has a home worth $100,000 and she owes $50,000 on it. If the bank will loan 90% LTV that means that she has $100,000 X .9 minus $50,000 equity in her home. In this case, $90,000 minus $50,000. This particular lender will provide Sally with a maximum $40,000 equity loan against her home.

If your credit is very strong, some lenders will do a 100% LTV or even higher. If you have over a 725 credit score, you may be able to obtain the maximum LTV Mortgage or Second Mortgage loan on the market.

SELF EMPLOYED

Many Self Employed people will spend good money on an Accountant to help them show as little income as possible through deductions & different accounting methods. This helps greatly when it’s time to pay taxes. This hurts when it’s time to go for a loan. If you are showing a very low income, telling the lender “I really make much more than that, but it’s not on the tax returns” won’t help. Lenders take the approach if it’s not on the tax return, it didn’t happen. After all, how are they supposed to get a comfort level that you really did make more, and how much? So they only consider what the return shows. They may add the annual figures you have listed for depreciation and amortization back to income, that’s about it.

About the only thing you can do to combat this disadvantage is to keep your credit strong with a high credit score. The higher your credit score, the more likely lenders will put less weight on your returns. That is not a cure all, but lenders will get a lot more motivated and have more programs and workaround solutions available if you have a 725 credit score with low income reflected on your Tax Returns as opposed to a 625 credit score with low income reflected on your Tax Returns. If you know that in a year or two your company will need to obtain loans, discuss this with your accountant. This is an important reason for showing income on your Tax Returns. Consider how much you will borrow, and how much the monthly payments will be for. Based on that, use your accountant’s advice on how much you should show in annual income to show a lender that you can meet all your monthly obligations plus the additional monthly obligation of the loan they are considering. This is extra work and hassle, but if the loan you need down the line is important, do it.

If you are a Corporation, it is likely that your returns show close to zero net income. This is what is supposed to happen, as it is common for corporations not to end up reflecting an income. Ironically, many lenders ask for the corporate returns and decline requests due to “insufficient cash flow”. In such a case, you should provide your personal tax returns also, since they will show income and strengthen your loan request

Personal Financial Statements

Lenders may request for you to complete a Personal Financial Statement, especially for larger loan requests. A Personal Financial Statement, in addition to tax returns and income verification, are among the most common ways for lenders to quickly take a look at your financial situation.

The primary things lenders look for on Personal Financial Statements are:

1) What is your liquidity? Liquidity means what you list for cash on hand, in checking & savings accounts, money market accounts, 401K retirement plans, Certificates of Deposit, listed Stocks (Listed means listed on the New York Stock Exchange or American Stock Exchange as opposed to stock issued by a non public company not listed on one of the above exchanges.

2) New Worth This is your total assets less your total liabilities. What lenders commonly look for is things most people list as personal property such as furniture, artwork, furnishings, collectables, jewelry, household items, as well as overvalued Real Estate, and deduct these from the total of your assets. The lenders believe should you default on a loan, they really cannot and have no interest in repossessing these items and trying to sell them for pennies on the dollar, so the completely deduct them from your asset value.

Most people over-value their real estate holdings, both personal and commercial. Lenders know this, will assess the value you listed and quickly discount it by 10% to 20%, or more, depending on what value you list for your home.

Depending on what you are applying for, they will then make an assessment of how you look financially, and based on the product and loan criteria, weigh your liquidity and Net worth into their decision.

Although a good New Worth is important, your liquidity is most important. Lenders see this as a secondary source of repayment. If you run into a problem financially, having a money market account or savings account will allow you to easily make a payment on a loan as opposed to simply not being able to make that payment. If you do not have cash in an account, it will be much harder for you to come up with a payment if you run into a problem.

Income verification & Tax Returns

A lender may request verification of your income via a paystub or a tax return. If you are employed by someone, providing a paystub is easy and satisfies the request. If you earn part of your income in commissions or bonuses, provide your most recent Tax Return, since the total income will be higher, making it more likely you will be approved. If your previous year has a higher income, provide the last 2 years returns because the average will be higher. The only exception to this is if the most recent year is substantially lower than the previous year. If that is the case, you don’t want to provide the previous year because it will look like your income is going down!