Are You Able? Are You Willing? Understanding Credit.
| | Thursday, January 11, 2007 @ 10:44 AM EST
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Contributed by: Tom Dunn
Tom Dunn Properties
Read more archived articles about Credit and Finance
A very basic introduction to lending and what lenders look for when deciding to give you a loan- for real estate or anything else.
I've been talking to a couple of new investors about financing, and I thought it might be good to explain some of the basics of lending.
First, what exactly are lenders looking for? The answer, surprisingly, is quite simple. Lenders are really only looking for two things: ABILITY to pay and WILLINGNESS to pay.
Ability to pay is determined by answering this simple question: After you meet
all of your monthly obligations, is there enough left over to pay this new debt you're asking for? This is a matter of comparing your provable income with your actual expenses. Of course, the bank doesn't usually know your actual expenses, so they apply some formulas and educated guesswork. The income part they get from your paystubs, W2's, and tax returns.
Willingness to pay is usually determined by looking at your credit history and asking your creditors for a rating of your payment habits.
If you have a history of
paying your bills and credit obligations on time, most lenders usually assume that you will continue to do so. Different lenders, even different loan officers working for the SAME lender, will assign varying degrees of importance to these two areas.
For instance, one lender may hold the belief that, as long as you have sufficient income (ability to pay) and there is enough equity in the deal to guarantee the Lender's position should you default, the loan is worth making.
Another lender may see that, even though you make a good income, your history says you don't make your payments, so she won't make the loanCredit scores
and algorithms have made the process more complicated than it used to be, but it still boils down to these basic factors.
If you understand this, and can view yourself dispassionately through the eyes of the lender, you will know how best to improve your credit standing and get the loans you need to grow your www.business.The simple truths of the credit world allow me to make three very general recommendations to beginning investors.
First, keep your job as long as you possibly can. The steady, provable income it provides makes a very favorable impression on lenders. Second, keep your total debt as low as possible. This will ensure that when you need a new loan, the lender can see that there will be room for it in your monthly budget. Third, pay your bills on time, every time. This demonstrates to the lender that not only are you ABLE to pay your bills, you are also consistently WILLING to do so. Now, go make more offers.
Note: Tom Dunn is a writer and successful real estate investor. He is the author of the popular DealFiles Real Estate Investor Stories website. Tom resides in upstate New York with his wife and three children.
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