What lenders look for in an application

If you are about to make an application for a loan why not take the sting out of the process by being as prepared as you possibly can.
The key to a successful loan application is... the better your credit, the less risk the lender perceives and the less a loan will cost you.

So, what does a lender look for when assessing an application? The most common answer is your credit rating. "Credit rating generally means things like employment history, debt history, liabilities, your job andhow much you make", says Rob Emmett, Managing Director of Collins Securities. "Other issues that can ring alarm bells are things like bankruptcy history, collection history. A 'lack of credit' is an unknown. If the person doesn't use credit it is difficult to assess how responsible they will be."

To assess the risk involved in lending to you, lenders piece together the story of your financial life, your spending and payment habits over the last few years. Try to see your application through a lender's eyes to assess the strengths and weaknesses of your story. Anticipate problems - a gap in employment history or late bill payments and include a brief letter of explanation. You may have had an illness, for example, a divorce, a death in the family or a period of searching for work before landing a job.

"Tell your own story by collecting supporting evidence. Well-prepared applicants are the most successful", says Rob Emmett.

So what is the perfect loan applicant?

Credit over two years -A steady history of on-time payments on different types of loans. Bank cards with credit to spare. Numerous credit enquiries in the six months before applying for a mortgage can hurt your credit score.
Employment history -Two years (no gaps) in the same line of work.
Housing payments: No late payments in the last 12 months; a maximum of one in the last 24 months. The lender's thinking: A borrower who has a history of making regular housing payments a priority will be seen as a potentially better customer.
Liabilities -To qualify for the best home loan rates your liabilities, car payments, credit card payments, home loan, student loan, spouse or child maintenance and the rest shouldn't amount to more than 42% of your income.
Assets-An amount equal to at least two months' mortgage payments, including principal, interest, taxes and insurance. Three months is better; some loans want up to six months' reserves.
But if you're credit history is not perfect...

Having a poor or patchy credit history is not an impossible obstacle. "Plenty of loans exist for such non-traditional borrowers", says Rob Emmett, who has approved many first-time home-buyers' loans.

Since your loan application will be viewed by people you'll never meet, a letter of explanation (keep it brief) is the best friend of the home buyer whose application veers from perfection. Scan your loan application for consistency in every detail with what's in your credit reports and explain any variations in your letter. Look for flaws, errors or a place where timelines don't exactly meet. (You left school in November, for example, and started work in February.) Include a good reason for the missing time period in your letter.

There's another home-buying myth - one of the requirements to buying a home is that you have to save a deposit," Rob says. "There are loans and loan programs out there and insurable programs for up to 100 percent of the value and beyond, based on your qualifications." What a deposit often does buy you is the opportunity to avoid paying for mortgage insurance, which protects the lender in case of a default.

One thing to keep in mind if you have less than perfect credit, is that your best friend is time. Positive information stays on your credit report indefinitely. Bad entries live for up to seven years, but carry less weight as they are replaced with a stronger record. Inquiries by merchants into your credit-worthine