When Getting A Loan, Lenders Look At More Than Just Your Credit Score

April 24, 2020
Last updated:
March 24, 2022
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When an insurance company issues a life coverage policy, it takes a calculated risk that it will collect enough monthly premiums so as not to take a loss when a claim is eventually made. Banks and mortgage companies in WA, ID, CO, and OR also take risks…on borrowers. Their hazard is called default — i.e. when a borrower stops making payments.

Yet this risk, too, is calculated. The entire loan approval process is how a lender determines the likelihood that an applicant will not default. This is why it will collect all kinds of information on employment, savings/retirement accounts, investments, etc. Prior to this, the lender runs a credit report.

Why Credit Scores For A Loan Matter

The credit report reveals much about prospective mortgagors. Granted, these merged reports — the work of three different reporting agencies — sometimes show debts that are in error. For the most part, though, a credit report helps underwriters to see how much of a debt burden a prospect is carrying.

It may show judgments relative to legal action taken by creditors. The report also displays charge-offs, those unpaid obligations that creditors chose not to pursue further. Most prominently, this account shows the lender FICO scores or VantageScore ratings: these are numerical indices rating the applicant’s credit history and present condition.

Scores measure the safety or danger in risking the bank’s money. When the score is high, the perceived risk is low, and vice versa. If you don’t want to spend any money, there are a handful of sites where you can check your score for free.

In a sense, credit scores are an instant summary of an applicant’s willingness and capacity to fulfill financial obligations. They serve as a basis for inductive reasoning: the subject has an exceptionally high rating based on prompt payments and manageable debt in the past. From this, a lender can infer that such responsible financial behavior will continue into the future. Scores are boosted and lowered according to several factors:

  • Timeliness and consistency in bill paying
  • How much debt the applicant carries
  • How long the applicant has maintained credit accounts
  • How many different types of credit
  • How often the applicant applies for credit
  • The ratio of credit in use to credit available

It stands to reason, then, that a customer can do well with bill paying but simply carry too much debt to earn exceptional scores (e.g. 720 to 850). This demonstrates that scores take a comprehensive view of creditworthiness. For this reason, they have a powerful impact on whether or not a mortgage loan is approved in Washington, Oregon, and other western states.

What Credit Scores Do Not Do

For all the weight credit scores carry in the underwriting process, they only tell a piece of the borrower’s story. For one thing, credit reports sometimes contain mistakes. For example, a judgment long paid off may still appear, adversely affecting the score. Yet even the flawless reports do not necessarily account for the future.

It can not predict medical expenses; the number of children a couple will have; legal conflicts; bad investments; or — very significantly — the loss of a job. The ability to remit steady payments to a lender can be unfavorably affected by any of these events…and many others. A sterling history does not guarantee a similar future. It does not minimize lender risk sufficiently. Other variables are just as influential.

How Stable Is a Borrower’s Employment and Income?

Finance companies and banks in Idaho, Colorado, and other western states take care to follow an applicant’s cash flow. While the credit report gives some indication of the destination, they are silent as to the source of that cash: a job or business. Tenure on the job, as well as the measure of salary and wages, signal what kind of loan an applicant can afford.

This is why most lenders take pains to verify employment before approval and again before closing. Too many job changes signal instability to underwriters. Requiring pay stubs and W-2 tax forms confirm the income stated on the loan application. For self-employed persons and small business owners documenting income stability can be more difficult. Except in rare cases, two years of tax returns showing stable income will be required.

If income is increasing year over year the lender will average the two years to determine your qualifying income. If the income is declining they will either take the lowermost recent income numbers or decline the loan altogether if the drop is significant. Depending on the time of year a business owner will also need to provide year to date financials to show the income hasn’t declined since tax returns were filed.

The source or sources of an applicant’s wealth are significant because the lender expects 180 or 360 months of consecutive payments. A borrower with a stable work history bolsters a bank’s confidence that dependable employment will continue for the duration of the loan term.

An applicant who bounces from one start-up to another — with months-long breaks in between — does not stack up well against an employee in the 23rd year with an established corporation. Tenure of service and the reliability of the employer make a difference with regard to an underwriter’s comfort level. Borrowers do well to make sure there is at least a regular human resources contact with whom the lender can correspond.

What Assets Does an Applicant Have in Reserve?

Even that stellar, veteran associate with the rock-solid company is not immune to job loss. In such a case, unemployment compensation might not be adequate to address the monthly obligations, a mortgage first and foremost. Compaq, Toys R Us, Borders Books, and Polaroid are all companies with settled histories that were forced to dissolve or severely cut back. Nobody is completely immune from income loss. What happens when the unexpected occurs?

One thing that lenders look at when deciding is that the buyer has a long track-record of responsibility. Mortgage lenders like to see that an applicant puts away wealth on a regular basis — it demonstrates a responsible attitude regarding the future. Any number of eventualities — of which job loss is only one — can sharply traumatize the household cash flow.

A financial reserve from which to draw allows a disrupted borrower to continue meeting obligations while attempting to recover from economic blows. Securing another job, for instance, could take up to a year under some circumstances. Assets available in savings accounts, certificates of deposit, money market accounts, and retirement funds are all eligible to count in an applicant’s favor. Real estate and other illiquid assets are rarely taken into consideration as compensating factors for standard financing.

Property: That Which Secures the Loan

Strictly speaking, the mortgage is not the loan. A mortgage is a document that establishes the subject property as collateral, or security, for the loan. In so doing, it allows the lender to take possession of the property in the event that regular monthly payments cease before the term is up or the loan is paid.

While mortgage lenders in Washington, Oregon, Colorado, and Idaho view foreclosure as an extreme measure, they nevertheless regard it as necessary in order to recoup at least some of their financial investment. Because of this, they must be sure of the property’s value, structural integrity, insurance coverage, and legal status.

Value is affirmed by a certified appraiser recognized by the lender. A licensed home inspector can attest to safety and stability while insurance declarations show the bank that its collateral is covered in the event of a fire or other disasters. Meanwhile, an attorney or title agency searches property records to confirm legal ownership and ascertain any liens that may be attached to the parcel. Often a survey is required to make sure no encroachments exist.

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Let Experienced Lenders Guide Your Loan Application

Before submitting an application for a mortgage loan, people do well to discuss their plans with a professional loan officer who can walk them through the process. In addition to quoting a rate, this consultant will explain what constitutes a strong application, over and above the credit scores. Discussing these matters in advance precludes inconvenient surprises later on.

Sammamish Mortgage has been in business since 1992, and we would love to help you. Based in the Pacific Northwest, Sammamish provides high quality mortgage loan programs in Washington, Oregon, Idaho, and Colorado.

If you want a rate quote, you can Contact Us, and we can sit down with you and explain the entire process. Or, if you’d prefer, you can View Rates on our website. Or, if you are ready, you can Apply Instantly or even get a Rate Quote.

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