A Personal Banker Shares what you may need in order to be approved by a bank
In working in banking for multiple years, I have learned quite a few things about finances that I wouldn’t have learned if it weren’t for my job.
I would constantly receive a variety of questions such as:
- How long does a bank approval take?
- What credit score do I need to be approved?
- Can I get approved after a bankruptcy?
- Do you think they will approve me?
These are all really great questions. However, a question that I received all of the time from my clients was – “What do I need to get approved?”
I figured I would write about my experience and help anyone out there who is wondering the same thing. What do you need in order to get approved for a bank loan?
Different Lending Options, Equals Different Lending Requirements
This is where we need to begin and clarify. There are different lending options that banks offer. Each bank has its own set of requirements. For the most part, they all follow a specific set of guidelines. Depending on what type of lending you are going for, the requirements are going to vary.
For example, credit card requirements are going to be a little more flexible than, a business line of credit. You still need to qualify for approval, you just won’t need to present much on your end.
What Questions Does the Bank Ask You?
If you are looking for a financial institution to lend you money, or anyone for that matter, there are going to be some questions involved. It’s better to be prepared. As a personal banker, anytime that I had a client who was interested in any type of lending product, I was trained to go into an in depth financial conversation.
The bank sees it as an opportunity to learn more about you, the client. Besides, if you are going to lend money, you want to have some assurance that you are going to see that money come back to you. Questions are going to vary drastically depending on the bank, and more importantly the banker.
Here are just a few examples to better prepare you:
- How much money are you looking to borrow?
- What is your current income?
- Where do you work?
- How long have you worked there?
- Are you a home owner?
- What outstanding balances do you currently have?
- Current monthly payments?
- What does your savings account look like?
- Do you have a 401k?
These might seem a little extreme and intrusive to give answers to right off the bat, especially if you don’t have an established banker on your side. Going to a stranger and talking about your financial picture can be extremely nerve wrecking for some. But, if you are planning to go to your local branch and sit down with a banker, be prepared for questions like these.
What do I need to get approved?
What do I need to get approved, was my most frequent question. I am not able tell you what you need to get approved because all of this varies bank to bank, but I can tell you what banks look for in order to approve you. Banks lend to those clients that are of low risk to lend money.
From my experience, this is bulk of what you will need in order to get approved by a bank:
- Passing credit score which can range from a 680 FICO and up
- A DTI % below 50 percent
- Sufficient Income
If you have a strong enough credit score, a DTI below 50% and strong enough income to support your debt, you are well on your way for approval.
Debt to Income Percentage (DTI %)
This is the decision maker. A lot of my clients thought that they could have a credit score of 700 + and be approved immediately. Not so fast! First of all, in the banking world, a credit score of 700 is nothing to brag about. Because your credit is considered to be fair, the bank looks at your income and monthly debts. This is where people need to learn more about basic banking.
If your income cannot properly support your current debt, let alone the new debt you are applying for, then unfortunately you will be declined. This is why you always want to stay away from debt.
Running your Credit
When you go have this sit down conversation with a banker, you should have already considered the idea that they are going to run your credit if you decide to proceed. Most of my clients come to me with the intention of only getting information. Once they hear the information, they want to apply. In applying, you need to be aware that you may or may not get approved. Regardless of the outcome, the bank will be running your credit. Running your credit at the bank or anywhere, counts as an inquiry on your credit report.
What Credit Score do I need to get approved?
This is a very common question too. What is the minimum credit score I need to qualify? I get this question all the time. Again, banks each have their own requirements. The banks that I worked with, would require you to have a minimum credit score of 650 to have a chance to be approved. However, I saw something different. I saw that you need at least a 675 or higher to have a fighting chance to be approved. Banks have become very strict with their lending. A score of 700 or higher, is where you would want to be ideally in order to clear the credit score part.
The bank will look at your outstanding debts. This includes any car payments, personal loans, school loans, credit card payments and any lines of credit that are reporting to your name. If a debt reports to the credit bureau under your name, then it is your debt and it will be factored as such on your application.
The only way to overcome a high amount of outstanding debt on an application, is to have a strong income to go along with it. The more that you can stay away from debt, the better. Clients that had little debt, almost always had a strong credit score to go right behind it. These are the clients that truly had financial confidence.
Not all products will require income verification. They banker or representative will ask you for total gross income. However, it is not verified. Meaning, they will not ask you to show proof in most cases. If for a credit card application or a personal loan, they require proof of income, it can be due to a variety of different reasons. Often times, your credit score is not high enough, you have a lot of outstanding debts, or you may have something flagged on your credit report.
When it comes to bigger loans such as a car loan, an equity loan, a business loan, a refinance and mortgage, you can pretty much expect to show forth some tax returns. In some cases, last two weeks of current paystubs are required in order to continue moving through your application process. If you have stellar credit (800 or higher), sometimes proof of income isn’t even requested.
Payment history will reflect in your overall credit score. They go hand in hand. In fact, payment history is your biggest contributor towards a great credit score. Throughout my banking career, I realized that banks take this into consideration on their application reports.
When the bank runs your credit, your credit application will reflect quite a few things. First on that report, is late payments. Needless to say, banks do not like late payments. I am not going to say that this will make or break your application, but this is something you want to consider as it raises an immediate red flag.
Banks want to lend to clients who have experience with their finances. They look for credit length. Banks want to see someone who has established credit for years. Brand new credit that is not well established, can work against you. This provides limited data for banks to work with in order to determine your level of risk. If your credit is brand new, or you have minimal trade lines established, it might be better to seek elsewhere, or hold off and keep working on establishing your credit history.
How to Calculate DTI
This is a quick and easy formula that banks use in order to approve you for any lending product. This is typically where a lot of people get declined.
First, you want to get an accurate gross monthly income based off of the annual income. Below is the formula that is taught within the banking world.
- Gross Annual Income divided by 52 Weeks in a year = Weekly Gross Income.
- Weekly Grossed Income x 4 Weeks in a month = Gross monthly income
Now, we want to go one by one and list every MINIMUM monthly payment that you are making each month.
This includes credit card payments, vehicle payments, mortgage payments, personal loan payments, line of credit payments. Anything that is reporting to your credit. If you co-signed for someone, then you need to include this as your debt. You are liable if the borrower stops making payments.
What is NOT included – monthly payments such as cell phone payments or any utility payments.
Once you have calculated your monthly payment total, you now want to divide the monthly payment total into the gross monthly income.
Gross monthly Income divided by total monthly payment amount = DTI%
Gross Annual Income: $100,000
Divide by 52 Weeks = $1,923 a week
Multiply $1,923 x 4 (4 weeks in a month) = $7,692
Now let’s say, that after adding up all of the monthly payments that this client pays on a monthly basis, we get a total of $4,500
We are going to divide $4,500 into the Gross monthly income of $7,692 and you will get your Debt to Income percentage (DTI%) = 58%
The different banks that I worked for, require for clients to be below 50% DTI.
For instance, in this case no matter how high of a credit this client would have had, they would be declined.
See how important this piece is?
Just by doing this simple calculation at home right now, you can figure out whether you have a chance or not. If you are well below the 50%, chances are you don’t need much help. But, you could qualify for a product that may bring value to your financial picture. Regardless, just check your credit score. If you have over a 700 FICO score, you have proof of income, and you cleared this part, you should have most of what you will need to get approved with minimum hassle.
How Long does a Bank Approval Take?
Again, different lending solutions have different requirements. Those requirements, are going to vary from bank to bank. Just keep that in mind. However, general rule of thumb from my experience, 24-48 hours for credit cards and personal loans and anywhere from 15-30 days for the bigger lending solutions such as equity loans, business loans, and lines of credit. You may get a conditional approval for the larger lending solutions, which typically happens significantly sooner. However, from time of application until you are signing your closing documents, this can take 15-30 days.
How to Go about Getting a Loan
If you have made it this far, and are interested in proceeding with a lending application, I would advise to reach out to your local bank. If you have an established personal banker, even better. Just let them know that you are interested in a lending solution and you want to get more information on what they require in order to get approved.
How to get approved at a bank, is something I have seen most want to know about. I hope that this guide provides you some value and gives you some confidence towards building your financial future.