Will good credit guarantee a loan?Annie Changcredit rating, loan approval
Yes - more than likely, good credit will guarantee a loan if you
are getting a residential loan. However, if you are getting a
commercial loan, other measures are considered.
On a commercial project, creditworthiness is not the most
important factor when lending institutions decide whether to issue
a letter of interest (a letter of interest in a commercial loan is
similar to an approval letter in a residential loan). For a
commercial loan, property income is the primary concern with the
net worth of applicants next and the final concern is the credit
The best way to guarantee a commercial loan is to show lenders
what they love to see. Show them 10-20 percent excess income
generated from the subject property after mortgage payments and
property-associated expenses have been paid.
Next, lenders evaluate an applicant's net worth. When an
applicant has sufficient net worth, he can weather unexpected
events. This is like financial insurance to the lender.
The final factor is the credit score. Although it's not as
important as income generation or net worth, a strong credit score
can turn difficult transactions into successful transactions.
Furthermore, strong credit scores can even allow access to a
greater number of funding sources and options.
Credit scores are determined by the three credit bureaus: TransUnion, Equifax and Experian. Credit scores range
from 350-850; the higher the score, the better the credit.
For residential loans, usually a single underwriter reviews the
loan following a standard procedure of checking off specific lists
or guidelines. With commercial loans, the process is not as defined
and guidelines are not as specific. Rather than a single
underwriter, a loan committee evaluates all information associated
with the project and applicant before making a decision on issuing
a letter of interest.
For commercial loans, there are not many quick-fix tips to
increase the property income or personal net worth; however, your
credit score is dynamic and flexible, and can be mastered with a
few simple strategies.
The key components affecting your score are your payment history
(35 percent), amount owed (30 percent), length of credit (15
percent), new credit (10 percent) and credit types (10
Following a few guidelines can maximize and even improve your
- Keep balances below 50 percent (33 percent recommended). To
evaluate credit scores, credit bureaus total the credit used
monthly. Credit bureaus add up all the credit limits, and the
credit score is determined by the percentage of use each month.
- Don't close unused credit cards with good histories. Since
credit bureaus add all credit limits to determine how much credit
one uses on a monthly basis, keeping some unused cards with good
histories can be helpful. They will keep the total percentage used
on all credit cards lower. Keep a manageable number of credit
cards. Typically, a person can manage three to five credit
- Don't open new credit you won't use. Although credit bureaus
total all the credit limits to see how much credit you use on a
monthly basis, opening a new credit card will negatively affect
credit in two ways: short length of history (15 percent of overall
score) and new credit (10 percent of overall score) don't help the
credit score. Often we are tempted by a credit card with a zero
percent introductory rate or 10 percent off from the first purchase
in the department store. If we take the offer, the credit history
is short and it's a new credit. Credit bureaus like to see
stability in a person's borrowing habits.
- Maxing out credit each month - even if paid in full - can
lower your score. If the credit limit is maxed out (30 percent of
the overall score) then the credit score will be lower, even if you
pay the full balance each month. Also, credit bureaus have
information about whether or not a payment has been received on
time, so be sure to make payments on time.
- Rate shopping with multiple credit inquiries within 14 days
can lower your score from two to six points from each inquiry. Many
clients like to shop interest rates when purchasing or refinancing
a home or business. Multiple inquiries from different mortgage
brokers or lenders can lower the credit scores from two to six
points for each inquiry. As a result, the interest rates may not be
better during the shopping process.
- Collections stay on the credit report for seven years. Try to
resolve credit problems before they are reported as collections.
Most lenders will require you to resolve large collections before
granting you a loan. If there are collections or charge-offs on
your report, the charges or collections will stay on the credit
report for seven years, regardless of whether they have been paid
off or not.
Following these guidelines will allow you to manage your credit
for maximum benefits. As mentioned above, a great asset of
commercial loans is that the loan committee can be very flexible
when approving a loan. The committee balances the three components
of a loan. The compensating factors can be the property income or
net worth if the credit score is less than perfect. Vice versa, if
the credit scores are good, the income and net worth can be less
Sometimes a letter of explanation for a so-so credit score may
be able to influence the loan decision. Working with an experienced
business loan specialist who can illustrate the benefits of funding
the project to the lending institutions is a worthwhile
Will a good credit score guarantee a commercial loan? The answer
is no, not on its own. It will be considered with several factors
in the overall package. And, although it may not be enough to carry
a loan on credit score alone, a good credit score can certainly be
Annie Chang is a senior loan officer of commercial,
residential and commercial loans with Prime Share Pacific Mortgage,
a full service brokerage firm in Castro Valley, Calif. She can be
reached at (925) 216-3618, e-mail [email protected]