the Credit You Deserve:
What to know before you apply for a loan
By Sue Durio
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.
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
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.
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
History - Any negative information, such as missed payments,
may remain on your report for seven years. Bankruptcy may remain
for 10 years.
Debt - While it is important to have some credit cards,
too many cards or lines of credit have a negative effect on your
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.
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 of Credit" are the basic factors upon which
lenders base loan decisions. They are:
- 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," notes McDonald.
To assess an applicant's character, lenders look to business and
personal references and credit reports, among other variables.
- 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.
- 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.
- 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 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
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.
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:
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.
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
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.
Published in Landscapes, a Farm Credit Bank of Texas publication