Loan eligibility is key when considering a personal loan for home improvement, financing a business, paying medical bills or consolidating debt. Generally, a borrower must have an excellent credit score and a low debt-to-income ratio.
Self-assessment is the first step to boosting your loan eligibility. This can include adding an earning co-applicant, reducing EMIs by refinancing existing loans and lowering debt-to-income ratio through repaying outstanding balances on your CIBIL report.
Credit Score
Your credit score — a three-digit number that rates your creditworthiness based on information from your credit report — plays an important role in your loan eligibility. A lender’s credit score helps them estimate your risk as a borrower and how well you have managed debt in the past. It’s one of many factors that lenders use to determine whether you will be approved for a loan and what interest rate you will qualify for.
Your payment history, how much you owe and your credit utilization rate (the percentage of credit used relative to total available credit) are major categories that make up your score. Your credit mix, which considers the types of loans you have — including installment accounts like personal and mortgage loans and revolving credits like credit cards — is another factor.
The length of your credit history also plays a role in your score, as does the age of your credit accounts. Opening multiple new lines of credit in a short period of time could lower your credit score.
Debt-to-Income Ratio
Your debt-to-income ratio (DTI) is an important financial measure that shows how much of your income goes toward paying existing debt. While your DTI doesn’t appear on your credit report, lenders often check it when considering your application for a new loan or credit card. When your DTI is too high, lenders may worry about your ability to pay back any new debt you take on.
To calculate your DTI, add up the sum of your monthly debt payments and then divide them by your gross monthly income. These debt payments include your mortgage or rent, car payment, minimum credit card payment, student loans and any court-ordered alimony or child support. Lenders have their own preferences for what constitutes an acceptable DTI, and staying within their preferred maximum is a good way to improve your approval odds. For example, Wells Fargo says that its ideal DTI for a mortgage is 36% or lower.
Employment History
Having a stable employment history plays a major role in loan prequalification. It provides proof of income, showcases your stability, and reduces the risk for lenders.
Conventional lenders prefer borrowers with an employment history of at least two years. However, they will consider a shorter employment history if you have compensating factors. For example, if you went back to school, your lender may view this as a valid reason for an employment gap.
Additionally, a stable employment history can enhance your loan eligibility by showing career progression and financial growth. Promotions and salary increases showcase your dedication to the company and can have a positive impact on your prequalification chances.
Having an employment history with frequent job changes and extended periods of unemployment can raise red flags for lenders. These concerns can be mitigated by providing a clear and compelling explanation for the gaps in your employment. You can also highlight transferable skills and industry experience to alleviate the lenders’ concerns.
Property Value
The property value of your home has an impact on your loan eligibility. It reflects how much your lender would expect to get for the property should you default on the loan, and that’s why lenders are careful to make sure the property is worth what they’re lending you.
Property value is determined by the market and a variety of factors, including location, condition, square footage, and other features. It also takes into account local supply and demand, and how other similar properties have sold in the area.
The value of a home is important for homeowners because it can help them decide when to sell and how much to ask for. It’s also a factor for those seeking a mortgage refinance or home equity loan because it determines how much they can borrow.