When it comes to financing your dream property in the country,
the better prepared and informed you are, the easier the process
will be. In the credit world, what you don't know can hurt
you. Realizing what a loan officer looks for, and understanding
how credit decisions are made, can help ensure you get the
credit you deserve long before you need it.
Get Organized
Many loans today -- especially smaller loans -- require less
paperwork than in the past. Nonetheless, some financial records
typically still are required to verify a borrower's ability to
repay a loan. This is particularly true if you are self-employed
or have changed jobs recently.
A borrower can dramatically speed up the loan application
process by gathering some commonly requested financial
records before the loan interview. Things to bring include:
- Three to five years' tax returns if you are self-employed or
have had an employment change. "The tax returns help
us understand the sources of income, as well as trends in
income," notes Jessie Purvis, senior vice president/chief administrative
officer with the Federal Land Bank Association
of South Mississippi.
- A balance sheet showing assets and liabilities. "You don't
need a CPA to do this. Usually between the loan officer and
the applicant, we can get pretty close," says Purvis.
- Salary verification, especially if the applicant has recently
changed jobs or has been promoted.
- The property's legal description and a copy of the purchase
agreement, if you're buying real estate.
Know the Score
In recent years, lenders increasingly have turned to credit
scores to make faster -- and sometimes on-the-spot -- loan
approval decisions, especially on smaller loans. Even on larger
loans, an applicant's credit report and credit score are factored
in with additional detailed credit analyses to determine an
applicant's creditworthiness. Because credit score can impact
everything from getting the best rate on a car loan to qualifying
for a mortgage or line of credit, it's critical that consumers
maintain the highest credit score they can. According to the
Federal Trade Commission Web site, www.ftc.gov, your credit
score is determined by several factors in your credit report:
- Payment History - Any negative information, such as
missed payments, may remain on your report for seven
years. Bankruptcy may remain for 10 years.
- Outstanding Debt - While it is important to have some
credit cards, too many cards or lines of credit have a negative
effect on your score.
- Length-of-Credit History - Credit-scoring models value
a long credit track record. Good repayment performance
with the same lenders over long periods of time has a positive
influence on your score.
- New Credit Applications - "Many department stores offer
purchase discounts if you apply for their credit card, and
while you may save a few dollars on that purchase, applying
for too many credit cards can negatively impact your credit
score," notes Tim McDonald, senior vice president/chief
credit officer, Great Plains Ag Credit, Amarillo.
The Five Cs
The "Five Cs of Credit" are the basic factors upon which lenders
base loan decisions. They are:
1. Character - the borrower's honesty and integrity. "Character
is ranked at the top of the list, because weakness in this credit
factor generally can't be compensated for with other credit factors,
no matter how well the loan is collateralized or capitalized,"
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McDonald. To assess an applicant's character, lenders look
to business and personal references and credit reports, among
other variables.
2. Capacity - the applicant's financial capacity to repay the loan. A
general rule of thumb is for this to exceed a 1.1:1 capacity ratio.
In other words, after all living expenses and taxes are covered,
lenders look for at least $1.10 of income for every $1.00 of debt
that must be paid each year.
3. Capital - the applicant's liquidity and solvency. "The lender
must be sure that the applicant has enough equity in his or her
assets to secure operating loans and to take care of unexpected
circumstances," says Purvis. While the percentage of owner equity
varies based on the nature of the loan, in general 50 percent
owner equity is a good target. To determine owner equity, divide
your net worth (assets minus liabilities) by your total assets.
4. Collateral - the physical property that will minimize the lender's
risk in the event of default. In the 1980s, many collateral-based
lenders got "burned" by the fickle nature of fluctuating land
values. That's why Farm Credit lenders place collateral toward
the bottom of the credit criteria list. "The last thing any Farm
Credit lender wants to do is take back a piece of collateral," says
McDonald. "We put the emphasis on the character factor, because
the single most important factor in repaying that loan is
the individual."
5. Conditions - the conditions for granting and repaying the loan.
Farm Credit's specialized lending experience enables loan officers
to structure loan packages uniquely tailored to rural borrowers.
"Many of our customers don't have a typical monthly paycheck,"
says Purvis. "We often have more loan choices available than
commercial banks have, and can structure virtually any loan
arrangement from monthly to semi-annual or annual payments
-- or we can split loans so they mature at different times to fit
the customer's stream of income."
Loan officers agree, the best advice to loan applicants is this:
Place a high priority on maintaining a strong credit rating, keep
good records and look for a lender with flexible loan offerings that
can adapt to your unique situation.
- Sue Durio
Clean Up Your Act
A clean credit report can mean the difference between
getting a loan or not. To make sure your credit report
is healthy, loan officers make these recommendations
to customers:
Get a copy of your credit report. By June 30, 2005,
consumers in the five-state Tenth District territory
-- Alabama, Louisiana, Mississippi, New Mexico and
Texas -- will be able to obtain a free copy of their credit
report once every 12 months through the three nationwide
consumer reporting companies, Equifax, Experian
and TransUnion. By Sept. 30, 2005, consumers in all 50
states will have access to their credit reports at no charge.
To order your free report, visit their central Web site at
www.annualcreditreport.com or call 1-877-322-8228.
Cancel dormant credit card accounts. Once a credit
card balance is fully paid off and you don't intend to use
the card again, cancel it first by phone and then follow up
by certified mail. Request a return receipt. After a month
or two, check your credit report to be sure it shows the
account "closed at customer's request."
Clear up mistakes. If you spot mistakes on your credit
report, send a certified letter, return receipt requested, to
the reporting agency with copies of documentation as
support. The agency has 30 days to investigate the issue.
The three major national credit bureaus are:
Equifax |
P.O. Box 740241, Atlanta, GA 30374-0241
800-685-1111 |
Experian |
P.O. Box 2002, Allen, TX 75013
888-397-3742 |
TransUnion |
P.O. Box 1000, Chester, PA 19022
800-916-8000 |
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