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Confessions of an Underwriter: 3 Tips for Your Financial Profile

This article was written by David Green, Head of Credit Operations at Earnest.

At Earnest, we review applications holistically and our mission is to reward financial responsibility with best rates possible. However, there are some things we see all too frequently in the financial profiles of loan applicants that can hurt their application. Here are three tips that could improve your financial profile when applying for a loan.

Pay Off Any Accounts in Collections….or Better Yet Don’t Let Any Accounts Go into Collections

Having an unpaid collection on your credit report will almost always lead to a lower FICO score, according to myFICO.  Yet it is a common occurrence to see clients who have great jobs, great education, perfect credit history and…a $73 unpaid collection on their credit report.  

If you are thinking about getting a mortgage or a new car any time soon, this small unpaid collection could cost you thousands of dollars due to the higher interest rate you’ll receive as a result of your FICO being lower than it should be.  

At Earnest, we consider the entire financial profile of our borrowers when underwriting a loan, so a $10 or $20 bill in collections may not always lead to your application being declined. But for the most part, lenders will decline an application that has a collection on the credit report.

Collections can happen for a variety of reasons and some of them are unavoidable. For example, a utility bill might not have been forwarded to a new address and that could eventually go into collections.  But many collections are avoidable.  

When talking to clients, one of the things we’ve heard many times in reference to a collection is, “I am disputing that charge, it was incorrect.”  While this may be true, it’s better to have this information corrected before applying for new credit.

Read more: The Importance of Making On-Time Payments

Balance Saving Emergency Cash With Paying Off Your Credit Card

Having an emergency fund is a very good idea. In fact, we like to see that you have enough savings to cover one to three months of expenses. But when deciding how much more money you should save on the side, consider your entire financial position.  

For example, one thing we see is clients with enough savings to cover four or more months of expenses—and they are paying 16% APR (or higher!) each month on a revolving credit card balance.

From an underwriting perspective, carrying a high credit card balance could affect your debt-to-income ratio—and lenders generally want to see a lower amount of existing debt in addition to a cash cushion.

The takeaway here is that you want to use a balanced approach when building your cash savings versus carrying debt, especially high-interest credit card debt which is expensive to you, and you have the means to pay it down.

Read more: 6 Ways to Improve Your Loan Application

Be Vigilant About Overdrafts

We never like to see our clients giving their money away to banks in the form of fees (that’s one reason we never charge fees at Earnest.) But when you overdraft your checking account, it’s a great opportunity for your bank to do just that. (Bank of America, for example, charges $35 for an overdraft on its standard checking account.)

And you would be amazed how often we see clients with more than enough savings getting charged overdraft fees multiple times per month.

If you are overdrafting because you have “overdraft protection” (which automatically transfers funds from one account to another), you might want to check your bank statements.  Quite frequently you will get charged a fee every time this transfer happens, even though the bank is just moving your money around.

From an underwriting perspective, an isolated episode of overdraft is not likely to derail a loan application; however, an ongoing trend of overdrafting your account could be construed as a negative indicator of your financial responsibility.

Again, the takeaway is to keep an eye on your checking and savings accounts and make sure your cash flow is sufficient to meet your monthly bills.

Disclaimer: Earnest does not provide tax, legal, accounting, or financial planning advice. This blog post has been provided for informational purposes only and is not to be construed as financial advice. Consult with your financial advisor, attorney, or accountant for personalized advice.

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