Applying for a loan is a stressful endeavor. Whether you’re a rookie applying for a mortgage on your first home or a veteran seeking to apply for a development loan for your business, getting approved is never simple.
With so much fine print and cryptic acronyms, you can even make a grave mistake if you don’t prepare properly. While most mortgage lenders are honest and forthright, some try to trick you with hidden information and jargon.
The most impactful factor on your loan approval is your credit rating. Make sure you check it beforehand and take steps to improve it. But that’s not the only thing you should be wary of.
So, we’ve compiled a list of the most important points of reference for successfully applying for a loan.
Do you even need a loan?
Before applying for a loan, make sure you actually need it.
If your current finances allow for your purchase, foregoing the loan might be the best long term decision. You might have to save up for a while and endure some sacrifices of luxury. However, not having the monthly installments with the threat of defaulting hanging over your head will make you a healthier person.
Budgeting is the name of the game, even if you do decide to take out a loan. Plan out the installments carefully and make sure you can actually make them. A big purchase always carries risk.
Take your time and do your research
Rushing head first into anything is a bad idea, especially a big loan.
Make sure you browse the market and research the best loan provider and plan for your situation.
Is it a secured loan or an unsecured loan? Is it a personal loan, a mortgage loan, or a HELOC? What’s the APR? Is the loan provider you are considering trustworthy?
There’s a lot of information to take in, so don’t rush and inform yourself properly.
Decide how much down payment you can manage
The general rule is – the larger the down payment you have, the lower your interest rate is going to be. If you need some time to save up for a larger down payment, make sure you take it, if it’s not an urgent purchase.
Having a larger down payment will save you thousands of dollars in the long run. If you can’t afford the down payment for your mortgage, you can look into down payment assistance. Especially if it’s your first home purchase.
Make sure your credit score is in order
Your credit score might be the most important determining factor on how good a loan you can secure.
Your credit score rating tells your potential lender how risky of an investment you are – how likely you are to default on your payments or make them on time. It is the best indicator of your character, and they take it seriously.
Make sure you check your credit rating before you go looking for a loan. The information will be valuable when determining the scope of the loan you can afford.
Here are a few things you can do to improve your credit history before applying for a loan.
- Timely bill payments increase credit score
Pay all of your bills on time – it shows good fiscal responsibility. You can even employ a credit monitoring agency to include your utility and rent payments in your credit score.
If you have an old, inactive bank account with a good payment history, make sure it shows on your credit report.
- Rectify the mistakes on your credit score
Even tiny errors, like a wrong address on your lender’s profile, can shift the weight toward loan denial. Big mistakes, like untrue payment truancy claims, can certainly ruin your chances of getting approved.
Request to see your credit report and rectify all mistakes. This will lead to a better credit score.
- Boost your credit utilization by increasing the limit on your credit cards
Credit utilization represents the percentage of your loan you actually used. If you only use $2000 on a $4000 loan, your credit utilization would be 50%. This is a good signal for lenders.
By increasing the limit on your credit card and using it for the same amount as before, you effectively improve your credit utilization and increase your chances of getting approved for a loan.
As a general rule of thumb, your credit utilization should be around 30% to send a positive signal to the lenders.
- Consolidate as much debt as you can
Consider taking out a debt consolidation loan if you pay too many bills to too many institutions. The debt consolidation loan will probably have a lower interest rate, and you’ll only have a single monthly bill to pay.
Passively, this improves your credit utilization and your credit score at the same time.
Shop around for lenders
Don’t just apply for a loan at the first lender you stumble across. Some lenders set minimum income requirements. Some have higher lender fees. Some wait for the closing costs to show their true nature.
Some lenders specialize in bad credit loans if your credit score is not up to snuff. These are all factors you should take into account before plunging into a 30 year mortgage.
Thorough research can save you thousands, if not tens of thousands, of dollars during the course of your repayment.
Conclusion
If we put in half as much effort into our more important life decisions as we do when choosing a Netflix show to fall asleep to – we would all be much better off.
The best way to make sure you get approved for a loan is to improve your credit score. But there are other important considerations, such as – do you even need a loan?