Top Loan Requirements
Taking out a loan may help you financially in several ways.
Whether you need funds to finance a major repair, pay medical bills, or buy a car or a home, a loan may be one of the best options to meet your financial needs.
However, applying for a loan requires some compliance with the eligibility requirements.
A lender would assess your creditworthiness and ask for supporting documents, before granting you a loan.
It’s important to keep in mind that not all loans are available for every borrower.
The bank also reserves certain credit categories for borrowers depending on income type and threshold.
A lender confirms that you’ve met all the conditions before advancing credit.
There’s no right to credit, and the financial institution has the upper hand in approving or declining your application.
To that end, we now look at the top loan requirements your lender will ask during a credit application. Read on.
Top Loan Requirements
While some lending institutions have no qualms about how you use the money advanced, some will want a budget of your spending.
This requirement mostly applies when seeking a business loan, and the bank will want to know how much you plan on spending on materials, equipment, cash flow, expansion, stock, and labor.
Besides stating the purpose, your bank may require supporting documents like invoices and sales receipts.
But aside from business loans, lenders may also require borrowers to state the reason for borrowing when taking out home loans.
These are a type of loan usually used to finance a home purchase.
Since a house could be considered a significant investment, lenders may have to know the purpose of the loan to provide them with the necessary information they need to assess whether the loan fits to your financial situation.
Typically, your lender will determine the lending risks by asking for important financial documents to support your application.
If you’re applying for a business loan, you’ll expect the lender to ask for the following documents:
- Bank statements, both personal and business
- Tax returns
- Balance sheet
- Account receivables and payables
- Business licenses
- Debt schedules
- Cash flow statements
- Business plan
- Income statement
- Payslips for personal loan applications
Sometimes, you’ll need a personal guarantee or proof of collateral. However, every lender has unique requirements when evaluating specific elements of your loan application.
By understanding specific documents and how these affect your loan assessment, you can make an informed decision on how to enhance your application.
A credit report is a statement of how you handle debt payments. A lender may hesitate to approve your loan application if you have multiple defaults or missed payments.
It also shows your credit score, which is a metric that lenders look at when advancing credit. The score, also known as FIFO score, ranges from excellent to bad.
You can get your credit report from any of the three approved agencies in the U.S. – Equifax, Transunion, and Experian.
Here’s a summary of the Experian’s credit report classification.
Before applying for a loan, you must know your credit score. Usually, lenders will reject your application if you have a fair to a very poor rating. However, few lenders may approve your application even with bad credit.
For example, Creditninja.com is a lender for bad credit if you provide an assignee with a good credit score. Additionally, they may ask for collateral to support your bad credit application.
Even though your loan application may be approved at this time, you can take the following steps to improve your credit for future applications:
- Review your credit reports to know what’s helping and hurting your credit score.
- Consolidate small debts to reduce your monthly payment into a manageable amount.
- Borrow only 30% of the credit card limit. Overborrowing may affect your credit score.
- Only borrow money when there is a purpose to avoid impulse spending.
- Don’t close unused credit accounts.
- Don’t skip repayments.
Bad credit applications can impact the interest rate and increase your cost of borrowing.
Hence, it may be best to boost your credit score first before submitting your loan application to the lender.
This way, you may improve your chances of getting a low interest rate for your loan.
When applying for a mortgage or car loan, your lender will require several documents to ascertain ownership of the properties.
The following is a checklist of the things you need for a car loan application:
- Vehicle Identification Number or the V.I.N.
- Utility bills, mortgage statements, lease agreement, property tax bill, homeowners insurance, and Medicaid benefits statement for proof of residence
- Drivers license, U.S. visa or passport, or government-issued identity card
- Employer Identification Number or the E.I.N.
- W2 Form or six-month statements for proof of income
- A 1099 form for self-employed persons
- Year, make, or model of the vehicle
- For trade-in, a certificate of title and a list of lien holders
- Proof of insurance
- Method of the down payment for the car. It can be cash, personal check, cashier’s cheque, or debit/credit cards.
- Federal tax returns
- Updated bank statements
When applying for a mortgage loan, some requirements are similar to the car loan application. However there are some unique aspects listed below:
- The physical address of the intended purchase
- Valuation reports to verify the real value of the property
- Rental income statements
- Proof of property tax payments
- Proof of payment of costs such as tax, insurance, and homeowners association fees.
- 30 days pay stubs or W-2 Form for income verification
- I.R.S. Form 4506-c for income tax returns
- Alimony and child support documents, if needed
- Retirement and investment accounts that include the 401(k) plans, certificates of deposit, and stock investments
- Copy of the purchase or sale agreement
- Bankruptcy records
There are indeed many requirements that you may have to comply with when taking out a mortgage.
But if it’s important for you to streamline your application as well as the submission of certain documents, you may consider getting pre-qualified for a loan.
Many lenders offer a free pre-qualification consultation to know if you’re ready to start the loan process.
For example, lenders like Security America Mortgage may be willing to provide a pre-qualification consultation if you’re a veteran who plans to apply for a home loan in Illinois or wherever you may be located.
By getting pre-qualified for a loan, you may be able to assess how much you should borrow for a potential home purchase.
Once you have met all the requirements, your bank will approve the loan. The approval process varies depending on the nature of the application. While a simple online personal loan can take up to 48 to be processed, a mortgage loan can take up to three months because the process is lengthy and involves third parties.
Regardless of the type of loan, it’s important to plan ahead, which is essential to having a healthy financial record.