Borrowing: Increase your power

If you are thinking of borrowing money from your financial institution it makes sense to be in the most powerful position at the outset.  Here are a few things you should know before you make your loan application.

1. Know your credit score- This is a critical piece of information used by a lender to determine how much risk they will take on by lending money to you. The higher the score the better.  You can check out your credit score at one of three credit agencies; Equifax, Experian and TransUnion.
   
   
2. Your borrowing power also changes based on the available balances on your credit cards and LOCs. Too little means your debt is too high which will increase your Total Debt Service Ratio (TDS).  This is a measure of your total debt payments versus your gross income.  If you are a homeowner it includes your monthly mortgage and related insurance payments plus other debt payments divided by your gross monthly income. As a rule of thumb the ratio should be less than 40%.  If you rent, your monthly rent is used in the calculation.  But be careful, too much available balance can be seen as a risk as well.  Why?  The lender will be worried if after you receive the loan you start increasing revolving credit card balances you may end up with a debt load you are not able to manage, increasing the chance you will default on your loan.   So before you open another credit card account think carefully about why you need it.
   
   
3. Job and housing tenure – The lender will look to see how long you have been at your job and residence as a measure of stability. Generally speaking, the more stable your circumstances, the stronger your application.
   
   
4. Income level – This will be used in your TDS calculation to determine how much debt you can safely carry. To calculate your TDS add your monthly debts and divide the total by your gross monthly income. For example:
   
   TDS Calculation

   Mortgage payment	$ 750
   Property taxes (monthly)	$150
   Personal loan	$250
   Credit Card (Limit $5,000)     (3% minimum payment)	$150
   Line of Credit  (Limit $10,000)      (3% minimum payment)	$300
   Total Monthly Debt	$1,600
   Gross Monthly Income	$6,000
   TDS = Total Monthly Debt ($1,600) ÷ Gross Monthly Income ($6,000)	26%

   This example meets the TDS requirement as it is less than the maximum 40%.
   

5. Type of job – The lender will assess what type of earning potential you have over the short (personal loan) and long (mortgage loan) term. 
   
   
6. Length of Relationship with Lender – The longer the track record you have with the financial institution the better.  They are able to look at your history to assess your paying and spending habits to determine how you handle yourself financially.

A lender s looking at your loan application and deciding whether to fund your request based on the total risk assessment.   The risk assessment not only determines whether you will get the loan but also your interest rate.  If you meet their maximum risk level to fund the loan your interest rate will be higher than if your risk level is deemed to be lower.