There are thousands of loan programs available from numerous financial institutions, but it is your credit score that dictates the loan program for which you may qualify. You should be aware of what your credit score is and how it affects you and your business.
There are three main components to a loan application. These components impact loan types and interest rates. The first component is your income from either working or from a consistent income flow, such as retirement or investments. The second component is your assets, such as money in the bank, security holdings or property. The third component is your credit history, and that renders your credit score. All three are important, but it is your credit score that is paramount to your success as a borrower.
The trend of credit scores is rising. Three years ago a good credit score was 680 points. Today's estimation of a good credit score is above 700 points; 750 points is great and anything over 800 points is fantastic.
Here is an overview of scores among the US population in 2003:
- 000 - 499 points: 1%
- 500 - 549 points: 5%
- 550 - 599 points: 7%
- 600 - 649 points: 11%
- 650 - 699 points: 16%
- 700 - 749 points: 20%
- 750 - 799 points: 29%
- Over 800 points: 11%
Credit scores usually range between 340 and 820 points. The higher your score, the less risk. As your score increases, the interest rate you are offered will usually decrease. But more importantly, when you have a better credit score, your options for financing are greater so that you can get a loan more quickly, more easily and with less documentation.
Most lenders use a compilation of scores from three major credit bureaus: Equifax, Transunion and Experian. The middle score of the primary borrower is used to determine the true credit score. If you are married, most lenders will use the score of the spouse that is the largest income provider.
So, what generally happens at different credit score levels?
680 - 700 P oints: You may be able to state your income from any and all sources without having to provide proof to the lender. With a higher credit score, you receive privileges such as this. If you are self-employed, this can be a huge benefit because you have proven you manage your money wisely and pay all your bills on time. Now you have earned the ability to leverage your money or buy more house than the bank normally considers you can afford.
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660 - 680 Points: You typically will be required to supply the bank with full documentation regarding your income, however, some lenders allow for stated income in this range.
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600 - 660 Points: There are alternatives for different loan programs but not usually stated income. You typically will be required to supply full documentation of your sources of income, your assets, and tax returns.
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< 600 Points: You will need to be flexible and take the best loan program offered. You will most likely have a prepayment penalty and a higher interest rate. However this can allow you time to repair your credit and then switch to a loan with better terms at a later time. Additionally, the rate is usually not favorable at the conclusion of the loan, so hopefully you have improved your credit by the time the loan term is over.
Even if your credit score is not as high as you would like, it is important to know that there are thousands of lenders and loan programs available. A good mortgage broker will know of the options to select from and be able to find you the right loan program that may save you thousands in financing fees. In fact, a new, independent Georgetown University study concluded that home mortgage applicants with less-than-perfect credit pay lower financing costs when they obtain their mortgages through brokers instead of directly from a bank loan officer.
You may want to take the time to have your credit report reviewed by a Mortgage Broker and receive advice on how to improve your credit score, no matter where it lies presently. As a bonus, InConcert Financial Group clients will receive a free evaluation from Tony Barbera of Pacific Mortgage Consultants. He can be contacted at tbarbera@msn.com or 1-800-843-3133. You can also apply online at www.PMGWEST.com .
Today most commercial banks serving small to medium size business markets use computer based credit evaluation models. Developed locally, these models have been in used effectively for over 20 years. These systems have proven to be what lenders require: reliable predictors that borrowers will repay debt.
The backbone of credit scoring models for small business is the credit score of the individual business owner - supplemented with additional information found in the loan application. The requirements for additional information may or may not include financial statements for the owner and the business and tax returns for both as well. The size of the loan requested is normally the factor that determines whether more is necessary. Irrespective of these additional requirements, computer driven models rely heavily on the credit score piece because it has proven to be the key predictor of a debtor's ability to repay.
As in the mortgage loan industry, the higher the individual's credit score, the more likely the applicant is to be approved for a business loan. Community banking lenders will normally utilize computer credit modeling systems for loans in a range starting at $50,000 and go to $250,000. In some cases, large lenders may extend the range to higher levels.
If you are interviewing for a loan ask how the process works meaning: what system does your lender use; credit scoring, judgmental risk evaluation or a combination of the two?
