How To Fill out a Credit Application
In this section we will go over the importance of the credit application, along with tips and hints on a successful application that will lead to the words we all like to hear, “Your Approved”... That’s right, a properly filled out credit application will assist in getting your loan approved, and get you the credit you are seeking.
Couple things that we need to go over first. You must understand that most lenders are using computer systems to decision the applications; these systems approve or disapprove applications, based on the information submitted to them. Programs are loaded into the systems, these programs are written by the banks, and are used to process the information about the borrower to determine the likely hood of repayment. So what does this mean? The days of a live person, a human being, looking at your application and making a human based decision that you will pay the loan back is almost over. A few lenders still base their decisions on a live person, but all the major banks are turning that process over to the computers.
Why you may ask? It’s simple. Computers do not have feelings; they do not get swayed by conversation or interaction with the borrower. They only process the information they are given, and make a non-biased decision based on the credit application, credit report and the banks pre-loaded decision making software. It protects the banks interest. Computers will only lend the money to people that make it through the program, and that meet the qualification the banks are looking for. I know this sounds terrible, that the days of going down to see Mrs. Sarah at the bank are over. The lady that you and your family have been doing business with for 40 years, the lady that you see at the market, or at church, or may even keep her children, may not be able to lend you money. But all is not lost.
Remember, not all banks are using this system, only the larger ones. The smaller home town banks are still relationship built, and still make the decision based on previous experience with the borrower, and have more flexibility with their lending. But if you are going to an auto dealer or a larger mortgage firm, or banks like: Bank of America, Capital One, Citi, Wachovia, you are going to run into the computer.
This is why the application has become so vital in the process. The information that you feed into the system, will affect the outcome. Good stuff in, good stuff out or bad stuff in, bad stuff out. If we start out the process with incorrect information, or if we have holes in our application, you are not getting the quality decision you deserve. So get ready, you are about to get the inside info on the credit application.
First up is your name and date of birth. I know that sounds simple, but it’s one of the most important things. The computer matches you’re name entered with the names on the credit bureau. So let’s say your name is George and you have gone by Buddy all your life, so you put Buddy on your application. Sounds simple, simple to a human that is, remember these are computers, they just process the facts. Once it sees that there is a name discrepancy, its throws up a red flag. The system has been programmed to look for fraud, and a wrong name is a major fraud indicator. So it’s headed in the wrong direction and the process has just gotten started. It’s best to apply for credit in the name your social security number was issued to, and not by nicknames. If you have been married, and your last name has changed, then make sure that your first name and middle are correct. Make sure that you use the correct date of birth; the system will match that to the bureau along with your name.
Next up is your address. This is a major fraud indicator, so this is monitored very closely. If you have recently moved, chances are you may have to prove you residence, so make sure you put your correct address. Most banks require the last 2 years of residence on the application, so fill out current and previous residence, if you have moved in the last 2 years.
Why are these three things important? The bank needs to know who they are lending the money to, and where the documents and payment booklets need to be mailed to. Since most fraud occurs over the internet, the systems are designed to match certain information in your bureaus to verify your identity. So take special care when giving this information, it needs to be correct. It’s hard to convince the loan officer that you forgot your name, or you put the wrong address on the application. You get the point.
Next is income. I see the majority of people that are declined are declined for the amount of income they put on the application. A little insight on the banks computer system. The banks set a few pre-determined ratios; these ratios are loaded into the computer programs, and help determine the lending decision. The first is debt to income and the second is payment to income. We will discuss both.
Debt to income (DTI) is the ratio of debt owed verses amount of monthly income. Example: let’s say that you make $5000 a month and your total bills on your credit report and application equals $4000.00 per month, then your debt to income would be 80%. The way you arrive at this number is to take the total amount owed per month and you divide it by your income. $4000 / $5000 = .80 (or 80%). I have yet to find a lender that will provide a loan to a consumer at such a high DTI, regardless of your credit score, you will be declined. Most bank set the DTI limit at about 55% to 60% of your gross income. So if you make $5000 month then your DTI limit would be set between $2750 to $3000 depending on the lender.
Payment to income (PTI) is the ratio of the new loan verses you monthly income. If you make $5000 per month, and the new loan has a payment of $450 then your PTI for the loan would be at 9%. You calculate the PTI by taking the new loan payment and dividing it by your monthly income. ($450 / $5000 = .09 (or 9%). Most banks for good credit will set the PTI at 18% to 20%, and for lower credit scores the PTI limits are 12% to 14%. Again, depending on the lender, but these are the industry standards.
Remember when you calculate your DTI, you must figure in the new payment you are trying to borrower, since that would be a new debt, it increases you DTI. I know this seems to be complicated, but this is why so many consumers get frustrated when applying for a new loan. No one has spent the time to educate them on the banks systems, and there for many consumers get charged higher rates and in some cases turned down. Remember the systems only process the information it is given.
When filling out the application make sure that you included all income that you’re a receiving. Use the gross income before taxes, not what you are bringing home. This gets a lot of people, they are asked how much they make, and not thinking they give the amount that their paycheck is each pay period. Well you make more than that, that amount is you bring home amount, not your total income. You must give the before tax amount. If you make $1000 a week, and after taxes you bring home $785, then your income is still a $1000.00 a week. The banks use the before tax income, known as the gross income, there is a big difference. So if you see that you may be running close on you debt and payment ratios, you need to make sure that all your income is included on the application. This will only help you get a better approval and keep from being declined by the systems. Applications with high Debt to income and Payment to Income ratios never make it through the system, they are system declined. Regardless of your credit score, you must make enough to pay the loan back in the computers eyes, or it automatically declines the application. Two years of employment history is required, so put down your previous job if you have not been on your current job 2 years. More information on income here.
Next is to make sure that you have filled out all the information out properly, review it, and then sign it. Remember you are painting a picture of your current situation to the lender; you need to make sure that the picture is correct. Some lenders will not allow you to adjust information once it is entered into the system, and the system declines the application. In this case you may have to wait 5 business days to resubmit you application to the lender, and that only slows down the process.
The application is a vital part of the lending process and must be filled out correctly and all information must be exact. Take the time to figure where you debt to income and payment to income ratios are, and make sure all income is taken into account so your application will be a successful one. I see good credit customers, ones that have never missed a payment on anything, turned down because they do not include all the income they are making. Remember the computers do not care, it only processes the information that it is given. Good luck and I hope that this information will be helpful to you.
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