Friday, May 4

Debt Ratios- Are they really that important?

Do lenders still use debt ratios when underwriting loans? They might depending on whether or not they use an automated underwriter or a human underwriter. Sometimes, they'll use both. Read on...

In our technologically advanced world, debt ratios no longer receive the same scrutiny that they used to. This isn't to say that they're not important, just that they don't receive as much attention as they used to. Today, most applications for credit are subject to a scoring matrix where numerous factors are taken into consideration. The number one factor is your credit score. Oftentimes, your credit score will determine whether or not you get the loan and the rate of interest that you'll be offered.

Things that these automated underwriting matrix's look at are:

  • Credit Score
  • Time on job
  • Time at address
  • Recent late payment history
  • Foreclosure\Repossession
  • Bankruptcy
  • Judgements
  • Number of accounts recently opened
  • Revolving account balances compared to account limits
If an application is not approved but 'deferred' to a human underwriter, they may consider, in addition to the automated findings, things like;
  • Your past relationship with them (if you've borrowed from them before)
  • Collateral for security
  • Debt Ratio
  • Savings and other assets

Debt Ratio can be very important if your application doesn't meet automated underwriting requirements, or if the lender uses a manual underwriting process!

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