What Do Lenders Look at and Why?
When you need to borrow money—whether it's for a mortgage loan, a HELOC, a home equity loan, a personal loan, or a line of credit—you may think that your credit score is the only factor that matters to lenders. The truth is that your credit score is just one small piece of the lending puzzle.
Nearly any lender you apply to borrow from will want to look at your full financial picture during the loan process. Your full financial picture will also play a large part in the interest rate you get on your loan—and can often mean the difference between long delays and fast approval.
But what exactly do lenders like Figure look at when weighing your loan application? Here are five criteria lenders look at when you apply for a loan—and why.
1. Your credit score and history
Your credit score is one of the main factors that lenders will weigh when you apply for a loan. Most adults who have borrowed money from a lender will have a credit score, which is typically a number in the range of 300 to 850.
The recent and historical information on your credit reports is equally important to lenders, as it shows lenders a range of information on your borrowing habits. Your credit report includes information on your outstanding debts, credit applications, collections accounts, delinquent accounts, and any past bankruptcies or foreclosures.
Why it matters
Your credit score and credit history help lenders predict how likely you are to pay back the money you borrow. The higher your credit score and the fewer credit blemishes, the less risky you look to lenders.
Having numerous issues on your credit report could result in a denial of your loan. It could also result in paying a higher rate for your loan—which would increase both your monthly payments and the total amount you pay for the money you borrowed.
How to improve it
The easiest way to improve your credit score and history is to pay your bills on time and use your credit responsibly. If you’ve maxed out credit cards, pay them down before applying for your loan. If you have collections accounts on your reports, you may want to pay them off before applying. You should also try to avoid applying for new credit products prior to applying for a loan, as it can make lenders wary of credit-seeking behavior.
2. Your income
Lenders will also want to know what your income is currently—and may also need to know what it has been over the last several years. As such, many lenders will ask to review your tax returns and other income-related documents to find out your monthly and annual income. If you’re self-employed or have multiple income streams, you may need to provide other documentation to prove your income.
Why it matters
Lenders want to know that you can afford to pay back the money you borrow, which is why your income matters. If your income is too low to cover your monthly loan payments, your lender can’t let you borrow the money you need.
How to improve it
If you have a low income, you can look for supplemental income streams, like side gigs or side hustles, to improve your chances of loan approval. In some cases, earning even a few hundred dollars more per month can mean the difference between an approval and a denial.
3. Any debt
Your income isn’t the only factor that a lender will consider—your debts matter, too. Lenders will compare the amount of income you make on a monthly and annual basis will to your debts. These include your rent, mortgage, car note, and other obligations. If you have too many debts you may not be able to afford repayments on another loan, even with a high income.
Why it matters
Having a higher income doesn’t automatically mean that you will receive approval. If your income is stretched thin due to having high debt amounts, or due to a large mortgage or rent payment, a high income may not be enough to overcome it.
How to improve it
If you have a lot of debt compared to your income, the best option you have is to pay down what you owe before borrowing. Focus on putting everything toward your current debt load to reduce your debt-to-income ratio. This will make it easier to get approved by a lender.
4. Your assets
You will also include the assets you own on your loan application. This includes the cash in your bank accounts, certain types of investments, retirement accounts, the home you own, other types of properties, vehicles, boats, or other tangible assets.
Why it matters
Lenders look to your assets list for two reasons. One is to make sure you have a strong-enough financial base to support your loan if you do end up defaulting. The other is to assess your overall financial health. A lot of debt with no assets is less attractive than someone who has a similar amount of personal debt but has assets that correlate with their debt level.
How to improve it
Put simply, there is no way to improve this metric. All you can do is make sure that all of your assets are recorded and presented properly. If you have cash in a bank or a tax-free savings vehicle, you should include it in this section.
4. Your employment history
Lenders will also examine your work history to look for gaps in employment or other signs of unstable employment. Most lenders will do this by verifying employment with your current and former employers directly, although some will examine W2s or other employment-related documents to verify your work history.
Why it matters
Without a solid work history, you may end up with a higher interest rate, as your loan will be deemed riskier. Stability is important for lenders.
How to improve it
If you have a spotty work history, you may be able to explain gaps in employment or other issues to the lender. And, if you have switched jobs several times for a good reason—higher pay, for example—your lender will likely understand. It’s also smart to avoid job-hopping around the time that you apply for a loan, but in some cases, that can’t be avoided.
