Applying for Credit

getting best rate and terms

Lenders use certain criteria when reviewing an application for credit. The criteria can vary depending on the credit application.

In almost all cases with home loans, personal loans, auto loans, and credit cards, the qualifying criteria includes a high credit score and and a sustainable debt ratio. Understand this criteria before you submit an application.

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What Lenders Look for in an Application

Every lender uses their own credit criteria when reviewing applicants for credit. Your credit report and score are important parameters, but so are other factors that may include the following:

Credit Standing

Lenders may review your credit report to analyze how well you manage your credit obligations.

They may approve or reject a credit application based on the credit score or other determinants that may include, for example:

— no more than 2x30
— no more than 1x60
— no 1x90

This means if the credit applicant had

— more than 2 times past 30 days late payment,
— or more than 1 times 60 days late payment,
— or 1 time 90 days late payment

reject the application.

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Credit Capacity

Lenders will approve applicants for credit when they meet capacity levels to repay the loan.

This is based upon your income and your current debt obligations. See qualifying income ratios below

Lender may also review your credit report for open revolving credit lines that have zero balances.

For example,
you may have applied and received a credit card from a lender years ago that is no longer in use but remains open at zero balance.

Every so often, the old credit card company may increase your credit line to prompt you to return. But you do nothing. The increase is reported to the credit agencies.

Even though you have a zero balance in the account, there is the "potential" that you can use the card and incur charges up to your credit limit, thus affecting your income ratios noted below.

Some lenders will add up all open line balances and use the aggregate total in their formulas for credit capacity. Under this credit review, the applicant may be rejected even though they have a very good credit history and maintain low credit card balances.

This is why you should close accounts that are not in use.



This is really important when applying for business-related loans and lines.

Lenders want to know whether your day-to-day dealings are honest and straight forward.

Lenders will ask for references of other businesses and suppliers. For consumer loans, lenders may request a reference from your employer.


General Reputation

Very important for consumer and business credit applications.

Lenders may review the credit report for:

  • length of employment:
    frequent employment changes indicate instability
  • credit inquiries:
    frequent credit inquiries shows lack of credit management
  • credit payoff vs. transfers:
    lenders like to see loan payoffs on the report

Lenders may also use references to gauge applicant reputation.


Mode of Living

Lenders understand that younger people are "debtors". They first incur debt as they start their path through life.

As younger people become married, have children, and eventually increase their overall income over time, they begin to payoff debts and accumulate assets such as mortgage equity, investments, and savings.

If a person submitting an application does not fit this profile, they may be viewed as "risky" applicant by the lender's criteria.

That is why lenders collect information related to your asset holdings. It is a good policy to open and maintain deposit accounts such as savings, money markets, and the like prior to submitting loan applications.



Lenders may request the applicant to collateralize the credit application. This is very common for home mortgages and auto loans.

Collateralized loans allow the lender to repossess the asset in the event the applicant fails to meet their credit obligations.

Other assets that may be used as collateral include investments and property.

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Your Capacity to Repay (Income Ratios)

Your capacity to repay the equity line is an important factor for lending institutions to qualify an applicant for financing.

If capacity ratios are too high, you will need to change one of the following parameters in order to qualify for equity financing:

  • reduce your borrowed amount
  • increase your LTV position
  • increase your income
  • pay off outstanding debts


Lenders use two debt ratios

1: The "HOUSING ratio":
calculated by dividing monthly housing expenses by your gross monthly income. As a basic rule, the housing ratio should not exceed 28%.

What are your monthly housing expenses:

  • current mortgage loan payment on your home including interest and principal
  • real estate taxes
  • hazardous insurance
  • private Mortgage Insurance, if any
  • other mortgage related insurance
  • homeowners association dues
  • ground keeping fees
  • property leases
  • other special assessments and financing

Monthly income includes the following:

  • employment income
  • overtime bonuses and commissions
  • net self employment income
  • alimony, child support and income from public assistance
  • social security, retirement, and VA benefits
  • workman's compensation or permanent disability payments
  • interest and dividend income
  • income from trust, partnerships, etc.
  • net rental income

2: The "DEBT ratio":
calculated by dividing monthly debt payments and other financing obligations by your gross monthly income. As a basic rule, the debt ratio should not exceed 36%.

What debt payments are includes:

  • housing debt payment (from above)
  • auto and other transportation loan payments
  • student debt payments
  • secured and unsecured loan payments
  • credit card payments
  • credit line payments (home equity)
  • alimony and child support payments
  • tax lien payments
  • other debt obligations

How Much Debt

The debt-to-income ratio is calculated by:

dividing your fixed monthly debt expenses by your gross monthly income.

As a basic rule, you should live within the following percentages:

monthly housing debt expenses including taxes, insurance: 25-28%
other credit obligations (credit cards, auto loans, etc.): 10-15%
your total debt obligations should be around: 36-40%

Calculating Your Debt-to-Income Ratio

Input the following data to calculate your debt ratio:

monthly housing debt/rent expenses including taxes, insurance
monthly installment loan payments
monthly revolving credit line payments
real estate loan payment on non-income producing property
alimony and child support
any tax or legal assessments
use this calculator to calculate the monthly expense from an annual expense


Monthly Mortgage or Rent (including escrow):
Monthly Auto or Other Installment Loan Payments:
Minimum Monthly Credit Card Payments:
Minimum Credit Line Payments (home equity):
Monthly Real Estate Non-Income Loan Payments:
Monthly Alimony and Child Support Payments:
Monthly Tax and Legal Assessments:
Monthly Other Payments:

Monthly Gross Salary or Pay:
Annual Bonus:
Monthly Alimony / Child Support:
Other Monthly Income:
Monthly Debt Payments:
Monthly Gross Income:
Debt-to-Income Ratio (s/b around 36%): %

Debt Ratio Barometer:

  • 36% or less:
    debt level within acceptable range for most people.

  • 37%-42%:
    debt level a little high, need to take corrective action to bring debt level down. You may consider paying off or consolidating some of your debt.

  • 43%-50%:
    danger level, need to take immediate action before you lose control of your financial situation.

  • 50% or more:
    excessive debt loan, may need to seek credit counseling services
* Calculations are based upon the assumptions you entered. Please note that rounding errors can make a small difference in calculations. Your actual mortgage lending rate may vary depending on your credit quality and lender. The circumstances surrounding your credit and loan qualifications may result in different calculations.


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Getting Approved By Whom

Prime Lenders:

Prime lenders offer the best lending rates and flexible loan terms and balances. The higher your credit profile, the lower the overall cost of your loan.

Prime lending is offered by all banks and other finance institutions.

Getting approved for prime lending interest rates and terms require the following determinants (these determinants may vary by lender):

If you meet this criteria, your chances of approval are great.


Sub-Prime Lenders:

Sub-Prime lenders offer lending rates that are slightly higher than Prime Lending rates. Terms and balances may not be as flexible.

Sub-Prime lending is available for applicants whose credit criteria fall below Prime Lending levels. Their credit history may show some late payments and/or higher than normal debt-to-income ratios.

Many banks offer sub-prime lending through divisions and special operations. The most common names in sub-prime lending include:

Household Finance (Beneficial)
One Main Financial
— Others

Getting approved for sub-prime lending may require the following determinants (these determinants may vary by lender):

If you meet these criteria, your chances of approval are great with sub-prime lenders.


Secondary Lenders:

Secondary lenders will generally approve almost anyone for credit. But the interest rates and terms are quite costly.

Secondary lending is available for applicants whose credit criteria is poor and whose criteria falls below sub-prime lending. Their credit history may show loan defaults, late payments, collections liens, and in some cases, past bankruptcy.

See credit score information

Getting approved is fairly easy. But the interest rate and terms can be at the maximum levels as regulated by State agencies.

Secondary lending is for credit applicants who need to improve their credit history or who fail to receive credit approval from sub-prime lenders.

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