How Loan Approval Works

You decide you need a loan for a house, a car, a computer or anything in between. So, you fill out the application and then wait. But what exactly are you waiting for?

Loan officers at any financial institution have a process they go through to determine if you and other applicants are a good credit risk. They are looking at several specific factors so they can determine your ability to repay the money you borrow from them.

Disposable Income
At Neighborhood Credit Union, we are most interested in your disposable income. We look at how much money your bring home after taxes, and how much of that take-home pay is available to repay your loan. Disposable income is our primary factor for approving or not approving a member loan.

Credit Score
Many other lenders rely on a credit score to make their decisions. Neighborhood does pull your credit score, but only to determine your interest rate. A credit score is a number formulated by a credit bureau based on factors like how much debt you already have, your history of making other loan payments on time, how long you’ve had any credit at all and outstanding loan balances. There are three major credit bureaus in the U.S., and they each have their own formula for determining a credit score. The higher your credit score, the more likely you are to get approved.

Debt to Income Ratio
Many lenders also look at your debt to income ratio. This number looks at how much debt you’re repaying every month and compares it to your income. Financial advisors generally recommend that people keep their monthly debt to 30 percent of their monthly income. Financial institutions often look at mortgage debt separately and have two ratios – one for housing and one for all other debt. That means you can sometimes have up to 60 percent debt (30 percent for each ratio). For someone making $3,000 a month, that’s a $900 mortgage payment and $900 in other debt.

Additional Factors
If your credit score and debt ratio are a borderline yes or no, loan officers will often look at additional factors. If your payment history with them is exceptional, that could work in your favor. Another consideration is your potential debt. You may have five credit cards that you haven’t used in five years. Some financial institutions will look at the credit limit on those five cards to see how much debt you would take on if you suddenly maxed out all five cards. Potential debt doesn’t usually work in your favor. However, cancelling those cards could lower your credit score, because you’re erasing some of your credit history.

We always encourage you to come to your credit union first, where personal service flows into the loan approval process, as well.