What Lenders Look For When Assessing Loan Eligibility

Lending money can make sense for many reasons, such as buying a car, financing an education, growing a business, or making home repairs. But before you apply for a loan, it’s important to understand what lenders look for when assessing your eligibility.


Key factors include your credit score, your debt-to-income ratio, and your employment history.

Credit Score

A credit score is a three-digit number that represents your creditworthiness to lenders. The score is based on your credit history as recorded in your credit report, which contains information about loans, credit cards and other accounts you’ve had. Credit scores summarize this data and present it in a way that’s easy for lenders to understand.

The components that make up your credit score include payment history, amounts owed and the length of your credit history. The mix of your credit (installment loans such as auto and mortgage debt, revolving credit like credit cards) and the number of new credit accounts you’ve opened also influence your credit score. The more established your credit is, the higher your credit score will be.

Because borrowers with high credit scores have a lower likelihood of defaulting on debts, lenders are generally willing to lend them money at more favorable loan terms than those with low credit scores. However, every lender has its own strategy for lending to borrowers and sets its own thresholds for creditworthiness. If you’re denied a loan or receive less favorable terms than those offered to others with similar credit profiles, ask the lender why. It’s required to provide you with a written reason or explanation if it cites your credit score as the reason for rejecting your application.

Debt-to-Income Ratio (DTI)

Lenders take a close look at consumers’ debt-to-income ratio, or DTI, when reviewing a loan application. This is because DTI reveals how much of your monthly income goes toward paying off existing debt, and it can help lenders determine whether or not you can afford additional credit.

DTI is calculated by dividing your total monthly debt payments by your gross monthly income. To calculate your own, start by adding up all of your monthly bills: rent or mortgage payments, car payment, loan and minimum credit card payments (not including any recurring medical expenses). Then, divide that number by your gross monthly income, which is generally derived from the sum of all sources of salary, tips, Social Security benefits, and investment returns.

While DTI is an effective indicator of how much you can manage your debt, it does have some limitations. For example, it doesn’t include bills like groceries or utilities, nor does it take into account alimony and child support payments unless these are court-ordered.

For this reason, many personal finance experts recommend working to lower your DTI before pursuing new credit, as it can be difficult to qualify for a loan with a high DTI. There are a few ways to do this, including paying down your debt and avoiding additional spending. You can also track your progress by calculating your DTI each month.

Employment History

Employment history refers to the number of jobs and employers an individual has held in their lifetime. Employment history is often a factor when determining loan eligibility for mortgages and other types of loans. Typically, lenders want to see two years of employment history to ensure that your income is stable. Nevertheless, the exact requirements vary from lender to lender, so it is important to shop around for the best rates and terms.

To verify employment, a lender will typically request verifications of employment (VOE) from your employer and any other employers you have worked for in the past. The process is usually quick and straightforward. In addition to the VOE, a lender may also ask for copies of federal income tax returns.

Occasionally, a borrower’s employment history can cause red flags for lenders, especially when the changes are abrupt or the borrower’s income decreases significantly. Frequent job changes, employment periods of less than two years, or recent large increases in income can cause the lender to view the applicant as a greater risk of default and decline their loan application.

For these reasons, it is important to keep detailed records of all professional developments in your career. A great way to do this is by keeping a file or a physical log of your employment history.


Assets are economic resources that can produce long-term benefits for a person, business or government. They are a measure of an individual or company’s solvency and financial health, with the value of assets subtracted from liabilities to yield a net worth. People, businesses and governments accumulate assets in the hope that they can make money in the future by selling them or using them as collateral for loans.

The most valuable and liquid assets are cash, bank accounts and investments like mutual funds. Other types of assets are current (or short-term) assets, such as inventory and accounts receivable; fixed assets, such as land, buildings and equipment; and intangible or nonphysical resources and rights that can benefit the company, including intellectual property, trademarks, copyrights and patents.

In the case of a home loan, assets are also used to calculate equity. Having more equity in your home than debt makes you a better candidate for borrowing, especially if the value of your assets has increased since your original purchase.

Often, lenders will require documentation in order to verify the eligibility of employment-related assets as qualifying income for a mortgage loan. For example, if you’re considering using your 401(k), IRA, SEP or Keogh retirement account balance as collateral for a mortgage, the lender will want to know that you have unrestricted access to the full amount of the funds in those accounts and that such assets can be withdrawn at any time without triggering tax withholding or other penalties.