When you apply for a mortgage or cash, the financial institution will start analyzing your creditworthiness. It depends on this research what amount, and whether at all, it will be willing to share with you. What reduces creditworthiness and why? How to prevent this?
Creditworthiness is the highest amount possible, which according to your institution you are able to pay back with interest on time. Importantly, because banks estimate it based on their own, individually set algorithms, each of them will offer you different maximum funding amounts. On the other hand, there are some factors that are negatively perceived by all institutions and result in reduced creditworthiness.
One of the most common reasons for reducing creditworthiness is low scoring. This is not particularly surprising, because it is a kind of applicant credibility test, which includes the analysis of many related factors. To assess the risk of lending to a given client, a bank analyst takes into account, inter alia, his:
- amount and source of earnings,
- current credit history,
- liabilities held,
- or even marital status.
Low points may result in a lower level of the DTI (Debt to income) ratio, i.e. the ratio expressing the ratio of the sum of monthly liabilities to net income. According to the recommendations for banks, the total monthly charge on repayment of loans and borrowings may constitute 50 or 65% of income (the higher limit applies to earnings above the national average). Therefore, if you earn USD 2,500 and the analyst lowers your DTI from 50 to 40%, then the monthly installment of the commitment may not be maximum USD 1250, but USD 1000 This will translate into a noticeable decrease in creditworthiness.
High expenses for household maintenance
To see if you can actually handle the repayment of the new liability, the bank will analyze your monthly income and expenses. Your credit standing will obviously be higher the more you earn and spend less.
For the bank, the most important item on your spending list is household maintenance costs. The problem is that he will not analyze them in detail, but will calculate them on the basis of the economic indicator published by the Central Statistical Office. If you live and live on your own, the bank will assume that your total cost of living is around USD 1,200.
Each subsequent member of the household, depending on the institution, will increase it by 600 to 1000 USD. This approach is beneficial when you and your partner work without having children; if you create a family, each child will increase costs and reduce creditworthiness at the same time.
Employment based on a specific task contract
In the case of civil law contracts, banks have different models for assessing the credibility of such income. There are banks that will accept 100% of such income, but unfortunately these are few cases. Most banks will reduce the indicated income by 20% or even 50% due to the costs arising from the civil law agreement.
Still other banks will require the submission of last year’s income (PIT or salary receipts) to assess income stability. The lower value will be accepted for creditworthiness testing.
Unfortunately, Good Finance has for some time stopped receiving income from civil law contracts for creditworthiness testing. Income from a civil law contract can only be treated as additional income and will be taken into account by Good Finance only in the event of a deviation from accepted procedures.