Prospective borrowers must consider quite a few factors before applying for a loan of any type, most importantly, perhaps is how much they can borrow.
Loan amounts and borrowing capacity greatly influence a borrower’s budget. For financing milestone purchases such as a first home, this is a big deal.
Whether it’s an auto loan, personal loan, or a mortgage, it’s important for those searching for a loan to understand what factors could affect their borrowing capacity and how lenders determine loan amounts.
1) Credit Score
Lenders determine loan amounts based on a borrower’s credit score.
Important criteria is taken into consideration while calculating one’s credit score, including frequency of credit utilization and payment history.
A borrower’s credit score measures the amount of risk a lender can expect if the loan is approved.
Multiple components can negatively affect one’s credit score, such as late payments or missing a credit card payment.
Having a good credit score can help to increase a borrower’s loan amount.
2) Credit History
A person’s credit history is connected to their individual credit score, which is analyzed before a loan can be approved.
Lenders will analyze a borrower’s credit report for alarming or suspicious activity. This activity could indicate to the lending institution that the individual is high-risk.
Red flags include numerous inquiries earned by borrowing sprees or applying for many different loan types at one time. Each time a borrower requests a line of credit, an inquiry appears on their credit report.
A credit report that shows multiple inquiries for a personal loan, a mortgage, or a new credit card within the same year reflects high-risk behavior that alerts lenders.
3) Debt-to-Income Ratio
Lenders and banks use debt-to-income (DTI) ratio to determine a borrower’s repayment capacity. This is important for all loan types, but especially applies to major loans like mortgages.
Mortgage lenders expect a borrower to spend 28% or less of their monthly gross income on a mortgage payment.
Consequently, lenders prefer a debt-to-income ratio that is between 28% and 36%.
Debt-to-income ratio is calculated by taking the sum of the borrower’s monthly debt payments and dividing it by their gross monthly income.
A good debt-to-income ratio indicates the borrower’s ability to afford the loan and lessens the possibility of them defaulting on the loan.
4) Employment History
Employment history ties closely with an individual’s income. Lenders will look at a borrower’s recent employment record to assess stability and reliability.
The typical employment history timeframe that is assessed can range from two to three years.
A borrower that has held the same position for over a year or two will seem low-risk compared to a borrower who has just started a new job or has held many different jobs within a short period.
Lenders will generally grant a greater loan amount to the safer bet.
Currently earned promotions or raises may not increase a borrower’s loan amount. This is because a lender considers the overarching consistency of the borrower’s recent employment record.
Consequently, a borrower that has earned an annual salary of $50,000 for several years but has recently received a $15,000 raise will be assessed based on the past salary rather than the new one.
When it comes to loan amounts, consistency in financial history and employment history is a key detail.
5) Down Payment
Lenders favor applicants who are willing to place sizeable down payments, whether it is for a new home or a vehicle.
For many lenders, an ideal down payment for a home is around 20%.
Placing a down payment of 20% or more heightens a borrower’s chances of being approved for a mortgage and can lower the interest rate.
A lower interest rate means a borrower can get more out of their mortgage — like a lower monthly payment.
This holds true for a variety of other loan options. Placing a large down payment upfront can help to reduce future payment amounts.
6) Collateral
Borrowers with bad credit, poor employment history, or low income may not qualify for standard, unsecured loans.
In such cases, some financial institutions, such as HRCCU, offer secured personal loans.
Secured personal loans allow borrowers to use assets, such as cash or property, as collateral to guarantee the loan.
Lenders are more likely to approve secured loans because the assets offered as collateral can legally be seized should the borrower not pay back the loan.
7) Loan Type & Loan Term
Banks look at a borrower’s application and then determine what types of loans the borrower is eligible for.
Once this assessment is made, the borrower can select a loan type that fits their needs and budget.
The terms associated with each loan type vary and should be discussed with the lender prior to accepting the loan.
Examples of loan terms include repayment period, such as 15-year verses 30-year mortgages, and associated fees.
Borrowers should work closely with the lender to determine what types of loans and terms are available to them.
Apply for a Loan with HRCCU
HRCCU offers a variety of loan options as well as credit cards, banking solutions and much more.
To learn about how to apply for a loan, the types of loans you qualify for, and how much you can borrow from HRCCU, contact us today. One of our financial experts will be happy to answer any questions you may have and help get you on the right track for your future.
