As a young adult the thought of a loan or owing a large amount of money can be a very intimidating. However, it might just be the fear of the unknown that is pushing you in the opposite direction. For this month’s Wellness Wednesday we brought in TS Bank’s, Russ Maguire, VP of Consumer Credit with over 30 years of banking and loan experience, to answer some loan questions and concerns.
When applying for a loan Russ says there are typically three things that a lender will look at:
1. Debt to Income
When the lender looks at this ratio they are looking at the amount of money you have left after living expenses, and before tax deductions. Living expense could include housing, food, utilities or even health care. The lender is just making sure that once your necessities are paid for you will have enough to pay your loan payment. This not only protects the lender, but you as well. Late payments are a slippery slope and can be damaging to personal credit, let alone the possibility of losing your home to foreclosure if payments cannot be made.
2. Loan to Value
This is the loan amount you are requesting to the value of the property. Why is this important you might ask? A typical recommendation for home purchase is that the borrower has 20 percent to put down for the loan they are requesting. Having this 20 percent down, eliminates the requirement to have Private Mortgage Insurance cost. It also gives the borrower a good head start on building home equity. The higher the amount of equity the borrower has in the home, the lower the risk of default.
First time homebuyers don’t fret. Russ mentions that there are several types of government assistance programs out there for you. These programs reduce the amount of down payment required and can require as little as 3.5 percent down. However, with a low percentage down, the borrower would be required to use PMI or Private Mortgage Insurance. There are also grant funds available depending on income limits of the household.
3. FICO Scores
Russ recommends building credit before applying for a loan, because the lower your credit score the higher your interest rate on the loan will be. Typically, a score of 740 or above should qualify you for the best rate options out there. How does one check your score you might be asking? There are three main bureaus used to collect scores in the United States including TransUnion, Experian and Equifax. You are entitled to one free credit check from each company per year. Russ recommends dividing the year into thirds and checking each during a different time of year. These scores should not vary too much between bureaus. It can depend on whether retailers/creditors report to all 3 bureaus so depending on reported trade lines, the scores can be slightly different.
Learn more about credit scores in our past blog: The Good, The Bad and The Ugly Kinds of Debt.
Besides the three major things a lender might look for, Russ also recommends receiving a pre-qualification letter from the organization you have applied to. Keep in mind that when you apply for a loan, the lender will respond within three business days to let you know how much you qualify for. Typically, this letter shows the seller that you are serious about purchasing and have already found an institution willing to provide funds.
Once you have closed on your loan and made your purchase there are a couple last tips Russ recommends. The first being to always trying to pay a little more on your loan then required. This extra principal dramatically reduces the interest costs on your loan over the life of the loan. The second tip is always paying on time. If you find yourself in a bind, call your institution and let them know immediately what is going on. They want to help you as much as they can, because when you are successful so are they!
This is just some of the information Russ discussed at this month’s Wellness Wednesday. Want to know more? Listen to the full podcast here.
Are you or someone you know thinking about applying for a loan? Visit tsbank.com/loans for more information on the different type of loans TS Bank provides.
Do you have more questions pertaining to the article? Reach out to us at tsbank.com or (712) 487-3000 and we will be happy to answer any questions!