Applying for a loan is not always an easy process as many bankers have tightened their lending restrictions and will not offer funds to just anyone. What can you do in order to get the money you need for a home, car, or new business venture? There are some things that a banker does want to see on a loan application and it can dramatically increase your ability to acquire financing.. A lender will look at your risk factor, which usually boils down to if you will pay and what you can afford to pay.
Income Statements and Balance Sheets
Income statements and balance sheets will play the largest role in your ability to acquire a loan. These aren’t always the areas that borrowers pay a lot of attention to as they all focus on their credit report and other things. While your credit score does play a big part in your ability to acquire financing, the income statement and security of this monthly income will also help the lender to see that you do have the money to pay for the loan. Your financial statements need to show you have less than 30% of your income going towards home loans, car loans, credit cards, and other debts.
Debt to Income Ratio
Let’s begin with “can you pay?” Basically with this a lender needs to see that you will make your monthly payments. They need to see little or no debt in order to know that you can pay because you aren’t focused on other debts. To get this ratio the lender will end up taking your net income and adding depreciation and amortization to see what your cash flow is. This shows the cash flow amount that is available after other loans and expenses have been paid off. Depending upon the lender you work with, they want to see a cash flow that brings in about 25% more than the loan amount you are seeking. What this means is basically you are asking for a $20,000 loan and the lender wants to see that your net cash flow brings in about $30,000 as it shows you have plenty of extra cash to pay for the loan.
Other factors to consider with a loan include other incomes like spousal income. This will show a higher cash flow amount and can be used to get a higher loan amount; allowing you to make the necessary upgrades and other things to your home to boost your property value.
What a Lender Wants
A lender wants someone that is a low risk. They are looking for the people that can handle debt well and will be able to repay the debt in a timely manner. Debt to income ratio is how the lender assesses your risk and will make a decision about the interest rate on your loan. Lenders like to see individuals that have been able to finance a large portion of their home, cars, and other expenses on their own without getting loans to do so. A rule of thumb for homeowners is that lenders want to see a debt load that is no more than 3 or 4 times your equity.
Finally the lender will look into your assets, especially your tangible assets. These are assets that the lender can liquidate in order to pay off the loan amount you owe to them. Keep your numbers up-to-date as they will be used as tangible assets and can go a long way in helping you to get a loan.