What Lenders Are Looking For: 5 Things You Need Before Applying for a Loan

May 1, 2025 admin Budgeting, Credit Building, Financing and Loans, Home Loans & Mortgages, Saving & Investing

Whether you’re applying for a mortgage, auto loan, personal loan, or even a credit card — one thing is certain: lenders want to know if they can trust you to pay them back.

That trust is built on a handful of key factors. The better you understand what lenders are looking for, the more you can prepare — and improve your chances of getting approved with a great rate.

Here are the 5 main things every lender considers before saying yes.

1. Your Credit Score

Your credit score is a snapshot of your financial history — and it plays a big role in lending decisions. It tells lenders how reliable you’ve been with previous credit and how risky it might be to lend to you.

Score breakdown:

  • 740+ = Excellent (best rates and terms)
  • 680–739 = Good
  • 620–679 = Fair (you might get approved, but at higher rates)
  • Below 620 = Poor (you may need alternative lending options like secured loans or co-signers)

Tips to improve:

  • Make all payments on time
  • Keep balances low on credit cards
  • Don’t apply for too many new accounts at once
  • Check your reports for errors and dispute them

2. Debt-to-Income Ratio (DTI)

Your DTI ratio is the percentage of your income that goes toward debt payments each month. Lenders use it to measure your ability to take on more debt.

Formula:
(Debt Payments ÷ Gross Monthly Income) × 100 = DTI%

Ideal DTI: Under 36% is preferred by most lenders
Maximum for mortgage approval: Typically under 43%

Example:
If you earn $4,000/month and your monthly debt payments total $1,200, your DTI is 30%.

If your DTI is too high, try paying down existing debt before applying.

3. Income and Employment Stability

Lenders want to see that you have a steady, reliable income — enough to make your loan payments without struggle.

They typically require:

  • 2+ years of consistent work history
  • Recent pay stubs or W-2s
  • Tax returns if self-employed

If your income fluctuates or you’re a freelancer, you may need to provide more documentation (like 2 years of tax returns and business bank statements).

4. Down Payment or Collateral

For large loans like mortgages or car loans, lenders like to see you contribute some money upfront — known as a down payment.

  • Bigger down payments = smaller loan = less risk for lenders
  • For mortgages, a 20% down payment avoids PMI (private mortgage insurance)
  • For auto loans, even $1,000 down can reduce your interest and monthly payment

In cases of secured loans, the asset (like a car or home) acts as collateral — meaning the lender can repossess it if you default.

5. Savings and Financial Reserves

Some lenders (especially mortgage lenders) want to see that you have money left over after the down payment and closing costs. These reserves show that you can continue making payments even if life throws you a curveball.

  • Having 2–3 months’ worth of mortgage payments saved is a strong signal
  • Emergency funds = lower risk in the eyes of a lender

Even if not required, showing financial cushion boosts your approval odds.

Final Thought

Getting approved for a loan isn’t just about having a decent income — it’s about presenting yourself as a low-risk, trustworthy borrower. That means solid credit, manageable debt, steady income, and responsible saving.

If one of these areas isn’t strong yet, don’t worry — you can work on it. Lenders want to say yes — your job is to give them reasons to.

Need help improving your credit or lowering your DTI? Check out our guides on debt management and credit building to take the next step.