June 13, 2018
Unbiased Financial Information Provided by Financial Finesse
Don't be intimidated by the loan application process. While every lender has different policies, forms and documentation requirements, the typical loan application process can be broken down into three basic steps.
1. Application Submission
Loan applications can range from short and streamlined to multi-page documents that request extensive supporting documentation. Whatever the level of complexity, all applications are designed to establish who you are, what kind of loan you're requesting, and your ability to repay the loan.
Generally, the larger the amount of money you want to borrow, the more extensive the application requirements. For example, you might only have to sign a few forms and flash your driver's license to qualify for a car loan, but for a mortgage loan you'll have to fill out a more complex application, pay a fee and provide documentation such as pay stubs, account statements and tax returns.
When you apply for a loan, the paperwork flows both ways. The lender should provide disclosures that spell out your rights and responsibilities as a borrower. You should also receive a Truth-in-Lending statement that clearly spells out the costs and key terms of the loan contract. Read the statement to make sure it matches your understanding of what the loan terms should be.
The lender's goal is to predict the likelihood that you will repay the loan. After you trade paperwork with the lender, the underwriting phase begins. This is the period when the lender assesses your three C's: character, capacity and capital (see definitions below). This assessment is based upon a review of your application and your credit report. The lender's goal is to predict the likelihood that you will repay the loan.
3. Approval or Denial
It can take a few minutes or a few weeks to find out if your application has been approved or denied. The length of the wait depends on the lender's policies, the risk level and size of the loan, and the cooperation of everyone involved (one person can hold up the process by not providing needed documentation in a timely manner). The lender should send you written notification of approval or denial within 30 days of your submitting a completed loan application. If you're denied credit, the lender must offer an explanation... it's the law.
Improve Your Odds of Getting the Loan
Following are a few ways for you to improve your odds of a speedy loan approval:
- Review and correct any mistakes in your credit report before you apply for a loan. Be prepared to explain any blemishes on your credit history. In fact, it's wise to submit a written explanation up front for any red flags in your report.
- Make sure the lender knows how to reach you if there are questions about your application. Unanswered questions stall the process.
- Supply the lender with requested documentation as soon as possible.
- Stay on top of the process. For example, if the lender is sending an appraiser, make room in your schedule for an appointment as soon as possible.
- Tell the truth. Trying to hide information that reflects unfavorably on you will only delay the process and cast doubts about your character.
Learn the Lingo
Character: The traits you demonstrate that give a lender clues about how likely it is you will repay a loan. To gauge your reliability, lenders look to your history of paying previous debts. They consider factors such as your education, occupation and income-earning potential as indicators of future behavior.
Capacity: The likelihood that your resources will be sufficient to meet your financial obligations. Lenders look at your cash flow and compare that to your debts to help them predict if you will be able to make your payments.
Capital: Assets you offer as security for your loan that will be sufficient to pay your debts should your cash flow dry up or your character change.
Credit Report: A report compiled by a credit reporting agency that contains factual information about you (like your name, address, Social Security number, birth date and the name of your employer) and your credit history. The report shows how much credit has been extended to you and how you have paid your bills. Public information such as tax liens, foreclosures and bankruptcy filings are also noted. Request copies of your FREE credit report at www.annualcreditreport.com.
As long as all your C's sing your praises, you should have nothing to fear from the loan application process.