What do underwriters value?
We have been talking a lot about how to deal with your debt the last few weeks(Part 1: Why Americans are in so much debt & ways to handle it & Part 2: Why Americans are in so much debt & ways to handle it), and now let’s talk about your credit.
To start off, understand there is a difference from your credit score to your credit worthiness...
Now understand what that is... your credit score is a number generated by the most complex algorithm. Most people that work for the bureaus don’t even know how it’s generated. The reason why we have the score is to easily identify people within a lot.
Having a nice credit score is like wearing a great outfit to the club. - it gets you in the door.
Once there/inside you still need game/swag, or at least a lot of drinks before you are going home with someone. Think of that next factor as your credit worthiness. You see your credit score gets you a glimpse and a conversation even, but your credit worthiness is what will have lenders ready to get in bed with you.
They want to see what your values are when it comes to the hierarchy of what you are willing and able to pay on, even what your knowledge of money is.
Let me give you some examples that are pretty common.
CREDIT CARD EXAMPLE
If you are someone that makes a lot of money so you have been approved for a lot of lending they want to see what your purchases are... is there a lot of unsecured debt, credit card purchases, loans not attached to anything? Those items aren’t back to anything (Houses, Cars, Student Loans, Assets) so underwriters don’t know where that money was spent. If that is in high access versus you using your own cash it looks as though you are living outside of your means and it can have them question your ability to keep up with new lending because you are overly leveraged.
CAR LOAN EXAMPLE
For those of you that have several car loans and no mortgage/house, that is also a sign to underwriters as well. Cars are a depreciating purchase and the more you take out in loans for them, it shows your knowledge of how to use money. When underwriters lend out money, the greater the chance of return of their investment the greater the likelihood you will receive your loan with good terms and interest rate. Car loans are secured to the vehicle so even if you are never paid a dime towards the loan, they can take the vehicle for liquidated damages. However car loans once driven off the lot have already lost some of its value and make it challenging for the lender to make a return on that investment. And because you are still heavily leveraged, those cars usually don’t hold much value for you to make a profit so purchasing a lot of items that don’t hold much appreciation value doesn’t bring confidence to a lender that you will make them money.
STUDENT LOAN EXAMPLE
My favorite example to discuss, because it affects so many people, are student loans. Many people nowadays have them and unfortunately, given the cost of living aren’t able to pay on them the way that the government would like to have them be paid back. So we end up deferring them or doing an income base repayment plan. While being in those plans don’t hurt your score necessarily they also show you don’t have the income to support any new lending, which also impacts your debt to income ratio. From a lenders perspective, they want you to be able to afford the current debt you have and still be able to take on the new payment of the debt you would be given. If you are deferring current debt or in a hardship based plan, it’s challenging to get terms you may want or be qualified for what you may want. This example impacts new college grads the most when they are looking at a mortgage or auto loan.
All in all underwriters look at everything, but the simplest thing to think about is the item that you are looking at using credit for yield a profit or appreciate upon sale of the item. If the answer is no, you probably don’t want to use credit for it.
Rule of thumb: Lenders lend to those that don’t need it.
If you are currently looking at opening up a new credit line/trade line these are some things to help ease your mind about the shopping process. When you go into it more informed you have less problems getting approved because you have a better idea about what to ask for. Because even if you pay everything on time if you aren't purchasing the right items to pay on lenders may not make as much... and that's all they care about.