As with most credit, loans require an application before you can be approved. The difference between a loan and credit is the amount of money that is to be borrowed and how it is paid back. Loans can range anywhere from a hundred dollars to over a hundred thousand dollars; there is no set monetary minimum or maximum amount. However, since most loans are usually for large purchases—such as a home, college tuition, or to start a business—the application process is much different than with other forms of credit. For example:
Lucy wants to start a business. She loves birds and wants to open a store dedicated to them—selling toys, perches, cages, and fun outfits, and including a room designed specifically for housing birds for a few days while their owners travel. Lucy has a good credit report and assumes that getting a loan will be easy. She goes to a financial institution to apply. However, despite her good credit history, they cannot give her the loan because she was not fully prepared for the meeting. Lucy realizes that—before applying for the loan at another financial institution—she should find out what she is required to bring with her, so she is totally prepared. What will she need?
Lucy is not alone. Many people do not realize what is required of them to apply for and successfully receive a loan. You must always be prepared by putting together a loan application package to bring with you to any loan application meeting. The contents of the package depend on the kind of loan you are applying for, but it will usually include the following financial and personal information:
- last two years of W-2 forms (if any)
- last month's pay stub
- last two years of signed federal tax returns (if possible)
- official documentation for any other sources of income (i.e., 1099 forms).
- two of your most recent bank statements
- official documentation for the source of your initial down payment on the loan (i.e., savings account statements for the last few months)
- proof of your identity (i.e., driver's license)
- Social Security number
Remember: if you are fully prepared for your loan meeting, the approval process will go much faster!
All this documentation will show the lender how much you make, how much money you currently have, and how much you have been paying in taxes for the last two years. With this information, the lender will decide if you are approved for the loan, how much money they will loan you, the interest rates, and the payment schedule.
A payment schedule, also called an amortization schedule, details how much is owed for each month, along with all interest that must also be paid. It is important to keep track of your payment schedule because, as with all forms of credit, missing a payment or making a late payment will be extremely detrimental to you.
Question
Why do you think having documentation displaying the source for your initial down payment on a loan is one of the items required in a loan application package?
This will show the lender that you already have enough money saved to pay for the initial down payment and that you will have enough to pay back the loan at the end of the loan payment schedule.
