loan approval



Personal Finance

Evaluating a set of standardized borrower and property (or other collateral) risk based pricing factors. Utilized to assess and mitigate risk for loan approval and underlying terms, or to decline the file.

Increased risk equals increased cost, usually through the interest rate of the underlying mortgage. The following factors and their derivatives affect the type, rate, and terms of a mortgage:

Loan Purpose, Property Type, Property Use, Mortgage Loan Documentation, Middle credit score (between the 3 major repositories, Equifax, TransUnion, and Experian). Loan Amount, Real estate appraisal value, (Use Purchase Price, if loan is a purchase), Loan-to-value ratio, Debt-to-income ratio, and number of months of mortgage history.

Pre-qualification is a term of art in retail finance, and means that a loan officer has taken some information from the borrower, and made a tentative decision, but not verified any of it.

With a pre-qualification, the borrower typically has not stated their social security number or other identifiers, so it is not possible to check credit. A borrower will give their employment, income and asset information and the amount of current monthly debt. In addition a borrower is asked about their general credit worthiness.

Based on this quick work up the borrower will be told that they pre-qualify for a certain loan amount. For example, if the borrower makes $15/h or $2600/month this is then calculated to an industry-standard ratio of debt to income, for example 36%. So if a borrower makes $2600/month they would be pre-qualified at a total debt of $936 (this includes any monthly payments, including car & credit card min. amount; along with the proposed payment of principal, interest, taxes and insurance).

A pre-qualification will contain the credit scores and much more information, including the social security number. The social security number is used to get a credit report. This is a requirement because you must have a credit score determination prior to any vetting of information, as that is one of the absolute factors required to give a proper pre-qualification.

Pre-qualification simply denotes a process that has not yet been underwritten to the guidelines of a particular lending institution. 36% debt ratio (the percentage of your GROSS income that the underwriting will allow you to spend on your mortgage payment, more commonly referred to as DTI) as referenced, above, is required for a true conforming loan type.

Typically, subprime lenders will allow 50% DTI. Common monthly debts used for calculating DTI are your mortgage (or new mortgage payment), auto payment(s), minimum credit card payment(s), student loans, and any other common monthly or revolving debt that is reported on your credit bureau report. Regarding a refinance, monthly debts that are being consolidated are not taken into consideration, because they are built into the DTI by way of the new loan amount payment.

Other factors included in determining your pre-qualification status, besides the basic DTI issue, are: Monthly gross disposable income (what you have left after all of your monthly debts are paid), number of open tradelines (credit lines) you have, and assets. Other factors that are important, because they may affect the rate of interest, which directly affects the DTI by changing the mortgage payment amount are: Property type, Property use, Property location, Loan to Value ratio (LTV),what State the loan is in, Credit Score, Purpose of Loan, whether or not you are a first time home buyer, if the refinance has a "Cash-out" amount requested, whether or not you've had a Bankruptcy or Foreclosure, how many times you have been late on a Mortgage payment, your Income Type and the way you will Verify your income (W-2, tax returns, bank statements, etc.

Inter-Business Interaction

When in context of Business Pre-Qualification is the procedure of one company attempting to become a preferred supplier of another through a form of advertising.

Traditionally the company seeking preferential status would write a letter of introduction often covered a brochure of product details and if possible a reference from a previous contract.

The potential customer would then if agreeable send out a questionnaire and in some cases a separate documents list in an attempt to assertion the financial stability, product line, quality and reliability of a company.

In more modern practices a potential supplier fills in a questionnaire online to submit the details needed. In most cases this then opens dialogue between the two companies for further information to complete the submission.

If a company is successful then when a customer requires a service it opens the project to bids from the relevant suppliers. The most attractive of which gets the contract.

In international business this process is at times complicated by laws in a country that state a foreign company must employ a local agency to handle their business.

Motor Racing

The term "Pre-Qualifying" was also used in Formula One racing in the late 80's and early 90's when there were over thirty entries to each race. The goal of this extra session was to reduce the field to 30 cars for the main qualifying draw. The top 13 teams from the previous two half seasons were exempted.

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