Loan Application

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A loan application is an application seeking approval from a lender to borrow a sum of money.

What is a loan application?

A loan application can be a paper application or filled out online. You are requesting a financial institution, such as a bank, to loan you a pre-determined amount of money with the intention of paying back the debt with added interest.

The loan application gathers your information to provide the lender with the ability to determine your creditworthiness, or how reliable you are to make monthly payments.

What information and documents do I need to submit?

Every lender will have slightly different requirements for their loan applications. However, in general, the first thing a loan application will ask for is your name, contact information, and other essential personal details. It may also inquire if you have any dependents and if you are married.

Next, the lender will want to see your income. This will determine if you can actually afford the loan and the monthly installments associated with it. You will need your most recent one month’s pay stub and the most recent two years of your Form W-2 from your employer. If you are self-employed and do not receive a W-2, your lender will likely ask for your profit or loss statements (Schedule C or Form 1040) from the IRS.

The lender will also ask to see your assets. Be sure to submit your most recent three months of bank and investment statements. They will investigate your bank accounts and personal finances. If you have had any large deposits or withdrawals, you may need to explain them. The bank will assess if you can manage the downpayment and the future monthly payments based on how much money you currently have.

Similar to your list of assets, your loan application will likely also ask for a list of your liabilities, or outstanding debts. Be sure to include any current mortgage payments, auto loans, credit card debt, and education loans. Your potential lender will use your total debt to calculate your debt-to-income ratio. This is to see how much of your current income is going to other lenders.

Others:

You may need to fill out an additional form or sign your name, which authorizes the lender to access your tax return and credit score. This credit check is a hard inquiry to see your credit report. Your credit report is a statement that shows all your credit activity, including credit card bills and outstanding loans. It also shows your credit history and how well you have paid your debts in the past.

If you have a co-borrower or co-signer, they will also need to submit their information on the application as well. Any missing documents may delay your loan application or result in denial.

What happens next?

After you submit the application with all the supporting documents, now you wait. The bank may contact you to request additional materials. Hopefully, within a few days, the bank will respond to your loan application with a Loan Estimate (LE). This is then followed by the official offer.

If the lender rejects an application, the lender must provide the borrower with an explanation, citing specific reasons, for the denial. Make the necessary changes to make yourself a more attractive lender before reapplying.