Whether you’re in the market for a new car or a new house, some things are the same. You’ll most likely need a loan for either option, and the same factors come into play when it comes to home or auto loan approval, from the amount you earn to your credit history. Before you start house or car hunting, make sure the odds of being approved for either a mortgage or a car loan are in your favor.
Your Income and Current Debt
When you’re after a home or auto loan approval, one of things a lender wants to see is that you’re going to be able to pay back the loan in the agreed upon time frame. Your income plays a big part in determining whether you’re able to repay, but it only tells half of the story. The amount of any other debt you currently have also plays a big part when it comes to loan approval. Lenders use your debt to income ratio when making a decision about you. The lower your ratio of debt to income, the better. Typically, if you want to receive a qualified mortgage, your debt to income ratio needs to be 43 percent or less. A debt to income ratio of less than 28 percent is generally considered ideal.
Credit Score and History
Along with determining whether or not you have the ability to repay, your lender will want to see that you have a history of repaying loans and that you’re most likely to repay the loan you receive. Your current credit score and your credit history help a lender see if you have a good history of paying back what you borrow, or not. If you have a record of missing payments or of making payments well after the due date, a lender might be less willing to approve you for a car or home loan, or might charge you a higher interest rate to better protect itself, in case you do end up unable to make payments.
Down Payment Amount
The amount you put down towards a new car or home also plays a part in whether you end up being approved for a loan. Typically, the more you put down up front, the lower the risk for the lender, as the loan to value ratio is lower. Making a bigger down payment not only increases your chances of being approved, it can also lower the interest rate you end up paying.
While down payment amount does affect your approval, it’s not the be all, end all decision, especially if you’re applying for a mortgage. Many lenders allow people to put down less than 20 percent of the home’s value, but then charge private mortgage insurance each month, which offers the lender some extra protection if the borrower ends up unable to repay the loan. Once the borrower’s paid off enough of the mortgage that the loan to value ratio drops to 80/20 or less, he or she no longer needs to make mortgage insurance payments.
Since different lenders have different requirements when it comes to loan approval, it helps to shop around before making a final decision. While one lender might turn you down or charge a high interest rate, another might approve you with a rate you can afford.
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Consumer Education Services, Inc. (CESI) is a non-profit service provider of comprehensive personal financial education and solutions for all life stages and for all of life’s milestones. Our goal is enhanced economic security for everyone we serve.
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