No matter the type, size, or purpose of a loan, borrowers can expect mountainous paperwork and documentation while applying, with even small errors and inaccuracies being scrutinized, and resulting in a rejection. As a result, it is better to understand the requirements beforehand, and have all essential documents at the ready, so that the application starts moving at a quicker pace with less friction.
While there are innumerable banks and financial institutions with unique internal systems and processes to ascertain risks, and make lending decisions, the application process itself is pretty streamlined and standardized across the sector. WIth the right documents on hand, borrowers can send out applications across a number of different institutions, before comparing and choosing the offer that best suits them.
- Identity & Address Verification
The first step in the application process is pretty standard, and that is to prove that you are who you say you are. For this, lenders request a government issued photo ID, with the name and other details matching with the information provided on the application. Institutions often require two photo IDs for this, both ideally government issued, and one with the main residential address such as the passport.
Beyond this, banks would also like to confirm your place of residence, and as such request a utility bill with your name on it, while also matching the address on your photo ID and application.
Applicants might encounter issues in this regard, especially if they don’t have any utility bill in their name, or have recently moved, and haven’t yet updated their residential address with the relevant authorities. In such cases, a bank’s internal policies come into play, and most often than not, this is unlikely to be an issue.
- Pay Stubs, Tax Returns & Other Sources of Income
Banks ascertain creditworthiness based on the income of an individual, and this is determined by latest pay stubs issued by their employer. If you’ve lost your pay stubs, or receive direct deposits, you can always request your employer to issue you the same, but if even that is not possible, there are a number of online services that offer free check stubs with verification to help with this.
While the pay stub proves current income, tax returns help paint the picture of an individual’s overall financial health, and consistency in earnings over the years. Any breaks, or periods of unemployment in-between are likely to affect the overall credit score, and creditworthiness of the applicant.
For the self-employed and business owners, or individuals with alternative sources of income such as child, or spousal support, income proof can be derived from a 1099 form, direct bank deposits, and other documents that the lender considers to be valid. This is also why most self-employed individuals find it difficult to get loan approvals.
- Bank Statements, Assets & Liabilities
To paint a complete picture on an applicant’s financial situation, expenses, and level of responsibility when it comes to financial matters in general, banks ask for a bank statement extending beyond a year. The transactions, their nature, and sizes help banks and lenders better assess the borrower’s persona, with various sophisticated systems and algorithms in place to uncover insights from such data.
Lenders also consider the assets and liabilities of an individual, and this includes investments, either in equities, bonds, savings, and property, along with liabilities such as credit card debt, outstanding loans, and more. Credit card debt is the most common debt for Americans. Even insurance policies, covering life, healthcare, property, and other liabilities are taken into consideration when ascertaining the ability to pay back even in cases of uncertainties.
- Credit History
Everytime you apply for a loan, your credit report is pulled from one of the credit bureaus, which the lender then uses to support their decisions, either to accept your application, or to reject it, along with the terms, duration, and interest rates to offer.
A credit history extends beyond just on-time payment of loans, and effectively looks for behaviors that signal financial prudence. For example, if you have a credit card, but never use it to the limit, it will likely be considered responsible credit use, resulting in a higher score.
Similarly, credit reports track bill payments across various utility service providers, along with rental payment history. Regular rental payments and utility bills being paid on time are signs of a stable income, and responsible financial management, all of which signal creditworthiness for banks and financial institutions.
Final Words
Depending on the bank or institution, applicants may be required to submit more documents as and when required, however, the above mentioned documents are largely standard, and something most borrowers need to keep on hand before making their applications.
