You will always be in a better position to take advantage of an opportunity if you understand it and you have the knowledge to take action.
The same goes with understanding what the banks look for when you are looking to borrow money.
I can’t tell you how many times clients have asked what numbers they need to show to get a certain amount. ?
The bad news is, the bank will never tell you exactly how they formulate an approval. For one, it’s proprietary information but mostly because that opens the doors to a lot of bad lending. (We definitely don’t want that happening again)
The GOOD news, you can still prepare yourself with this information.
Ever heard of the 3 C’s of lending? It’s not a big secret but people don’t realize that knowing this allows you to prepare yourself for when you want to apply to borrow money.
Character (or Credit)
Does your credit history show that you handle your loans responsibly and pay on time?
When business owners apply for a loan for their business, they often ask why the lender needs to pull their personal credit report.
Even though the business is it’s own entity, the business owner is the one that typically makes the payments. The lender wants to know that the one making the payments has a history of making payments on time. Your personal credit history is the best indicator of this.
Why is the credit such a big factor in the decision? For the most part, lenders are not in the business to repossess property, they just want to get paid. They don’t want to have to liquidate the collateral to recover their money.
Cash flow (or Capacity)
Do you have sufficient income and the ability to pay your current debt payments as well as the new one? The reality is that the lender wants to make sure that you have enough income to make your current payments and the payments on the new loan that you are requesting. Making sure that you have enough income (cash flow) is important. Not only to the lender, but to the borrower as well. The last thing you would want would be to be issued a loan that you ultimately can’t afford to pay or would put you in a tough position to pay.
Is the value of the asset available sufficient to cover the loan being requested in case of default? In the case of real estate the lender would want for the value of the property enough to cover the amount of the loan.
The 3 C’s are fundamental to how lenders look at loans. There are other factors that they take into consideration but if you have these three ducks in a row you are in a good position to be approved for the loan that you are requesting.