The lending environment has caught on to the ever increasing technological environment of our word. Major financial institutions process thousands of loan applications each day. As the years have progressed more applications are done through the internet. Most lenders now use electronic underwriting as a way to process loan application. They set up a list of criteria that applications must meet. Some applications are automatically declined, some are automatically approved, and some are referred to a lending representative for further consideration.
What is Underwriting?
Loan underwriting is the process used to look at a loan application and decided whether or not to grant the loan. Underwriters use a variety of factors to determine if an applicant is credit worthy.
Underwriting Factors on a loan application:
- Length of Employment
- Credit Score
- Payment History
- Credit Tradelines
- Debt to Income Ratio
How Does Automated Underwriting Affect You?
With automated underwriting, you have to make a strong first impression. If you have anything that falls beneath the minimum criteria your loan request will be denied and never even seen by human eyes. The lender will not want to consider superfluous details regarding your application. They will just see the negatives and move on.
Credit Report Factors That Can Automatically Disqualify You From a Loan:
1- Credit Score
Your credit score is one of the first benchmarks a lender looks. In order for a loan to be approved your score must be above a certain level. Most lenders will not grant a loan to anyone with a score below 600. Lenders will disregard all other aspects of your application if you don’t meet the minimum credit score requirements.
2- Debt to Income Ratio
Your debt to income ratio is another big factor on a loan application. A debt to income ratio is calculated by adding up the total monthly payments you make on debts and dividing it by your gross monthly income. Your debt to income ratio will also include your mortgage payment or monthly rental amount. Lenders typically want to see a debt to income ratio that doesn’t exceed 45%. Anything about that percentage is considered to be over extended. During the automated underwriting process lenders may decline any applications that exceed 60% debt to income ratio.
3- Length of Time Since Late Payments
Another piece of criteria in automated underwriting is the length of time since late payments have been made. Many lenders may automatically decline any application where the borrower has current or recent late payments. Lenders see late payments as a sign of financial irresponsibility and struggle. Therefore, if an applicant has several recent late payments they may automatically decline the application.
4- Collections & Charge Offs
Most collections and charge offs warrant an immediate denied loan application. If you have a bill that has gone to collections or other loans that have been charged off from not being paid, a lender does not want to lend you more money. Collections and charged off loans are a sign of financial struggle. A lender will not want to take the risk of having their loan go into collections.
How Automated Underwriting Criteria is Set Up
There are several different platforms to use for automated underwriting. Each lender sets up their platform and can specify different criteria. Criteria can fluctuate depending on the loan type. An application for a $40,000 auto loan will be much more stringent than a $500 credit card. The underwriting guidelines are set up to help lenders avoid risk.
How to Be Automatically Approved
Most lenders have stringent guidelines to automatically approve an application. They will want a credit score in the mid 700’s or higher, a debt to income ratio below 35% and no recent late payments or delinquencies. However, just because your application isn’t immediately approved does not mean you won’t get a loan. It just means a lending representative will have to analyze your application to determine if you’re credit worthy. However, if your loan is automatically declined, the lender will not reconsider the application until your credit report improves.
While applying for a loan, be sure to take your time and fill out your application thoroughly and correctly. You want to provide the most accurate information possible. Consider the factors listed above when applying for your next loan. Clean up your credit report as much as possible before your try to get approved for a loan.