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Borrowing Options: How a Loan Officer Makes a Decision

By March 5, 2025June 24th, 2025No Comments

Introduction

If you are applying for a loan or a line of credit, you might want to know what your loan officer is looking for when evaluating your credit application. Each loan application is different. For instance, some credit card applications ask for little more than your name, Social Security number, and annual income. In contrast, a home mortgage application may ask for detailed information about your monthly expenditures, your employment history, and your bank accounts.

A loan officer’s job is to avoid loan agreements that have a likelihood of default. Traditionally, the loan officer did this by individually examining each loan application and making a decision about the applicant’s creditworthiness based on experience. Many small lending institutions still operate in this manner. However, most lenders now use computerized models, credit scoring systems, statistical data, and recent trends to determine the likelihood of default. Depending upon the size of the institution and the number of applications received, your application may never be seen by a real loan officer. However, the loan officer is still responsible for protecting the lender from high-risk loans and for implementing the credit evaluation system.

What is the loan officer looking for?

Track record with prior loans

Loan officers want to see that you have obtained credit in the past and paid as agreed. Your application may ask about previous credit relationships, but more likely than not, your loan officer will gather the information from a credit report. Various credit-reporting companies amass information about your credit history and make it available to subscribers. Loan officers look at your credit report and want to see good credit relationships.

The ideal credit history shows that you borrowed large sums of money, made timely payments, and paid off the entire balance as agreed. Depending upon the type of loan you are applying for, your loan officer may be willing to accept something less than ideal. Nevertheless, loan officers do not want to see chronically late payments, collection efforts, charge-offs, repossessions, and bankruptcies. Some lenders use nothing more than your credit report to make a decision regarding your loan application.

Tip: You can correct derogatory credit that appears erroneously on your credit report.
Ability to repay proposed loan

Many credit card companies and local banks will extend lines of credit without inquiring about your monthly expenses. However, for larger loans, your ability to repay should be a primary consideration for the loan officer. If you do not have sufficient income remaining at the end of each month to service your proposed loan, then you can’t afford the loan. Loan officers want to see adequate income after expenses.

Tip: If your income is insufficient, some loan officers will condition your loan by proposing that you borrow less. They may also suggest that you make payments over a longer period of time to lower monthly payments.
Stability of income

Your application may indicate that you have sufficient income to service the loan today, but what about next month or next year? The loan officer wants to see that your financial situation is not likely to change for the worse. Since most borrowers derive their income from employment, your loan officer will want to see job stability.

The ideal applicant has been on the job for several years. This suggests that both employee and employer are happy with the relationship and unlikely to make unforeseen changes. The ideal applicant is highly skilled, highly trained, and/or well educated. This suggests that the applicant is valuable to the employer and not easily replaced. Once again, your loan officer may be willing to accept something less than ideal, but generally an examination of these factors helps a loan officer determine whether you are likely to be earning the same income over the life of the loan as you are earning now.

Technical Note: Your lender cannot consider the source of your income when determining your creditworthiness, only the amount and stability. Thus, if you are independently wealthy and living on the interest and dividends from your investments, or if you receive public assistance, this income is just as favorable as income from employment, as long as it is sufficient in amount and not likely to decrease or terminate in the foreseeable future.
Personal stability

Many applications ask questions that are designed to gain information about personal stability. Typical questions are as follows:

  • How long at present address?
  • Own or rent?
  • If rent, furnished or unfurnished?
  • Dependents? How many?
  • Age?

Lenders want to know if you are the kind of person who stays put. They do not want to have to look for you if the loan goes into default. They want to see that you are entrenched in your neighborhood and are likely to be there during the life of the loan.

Technical Note: Federal regulations prohibit use of information about marital status and children in making a credit decision.

What is credit scoring?

Many institutional lenders use credit-scoring systems to determine whether a loan will be approved or disapproved. The concept is simple. You complete a loan application. The lender fills out a standardized credit scoring sheet assigning numerical values or scores to each of your answers. This can be done by an employee or a computer. Once the sheet is completed, the numbers are added up. If they equal or exceed a minimum acceptable total score, then you get a loan. If not, you do not get a loan.

The numerical values are derived from historical data and based on the performance of similar loans. The system is faster than the traditional method of evaluating credit applications. The loan officer needs only to determine which scoring system to use and what the minimum acceptable score will be.

The number and type of questions asked by a credit scoring system may vary from lender to lender. The minimum acceptable score also varies depending upon the amount of risk a lender is willing to take. However, when used properly, the scoring system is designed to quickly identify many of the same factors that loan officers traditionally looked for when reviewing an application, such as your ability to repay the loan, your job stability, and your personal stability.

Caution: A fault of credit-scoring systems is their inability to evaluate special circumstances. You may be a good credit risk even though you do not score well under a particular scoring system.
Example(s): A young manager in a large hotel chain is transferred from one hotel location to another several times over the course of two to three years. She moves often and usually rents furnished apartments. Although she earns a good salary and has good credit, she scores poorly under most credit scoring systems because of her frequent relocations.

To avoid this scenario, some loan officers individually review all rejected applications to determine whether there are independent grounds for approval.

Tip: Under the Fair and Accurate Credit Transactions Act of 2003 (FACTA), mortgage lenders are required to tell you the credit scores they used in the process of providing the mortgage.

Conclusion: Making Sense of Loan Decisions

Understanding how a loan officer makes a decision can help you prepare for the loan application process and improve your chances of approval. Loan officers assess various factors, including your credit history, ability to repay, income stability, and personal stability, to determine whether you present a low risk to the lender. While traditional evaluation methods still play a role, many financial institutions now rely on automated credit-scoring systems to streamline the decision-making process. These systems assign numerical values to different aspects of your financial profile, making loan approvals more efficient but sometimes overlooking unique circumstances.

For borrowers, the key to securing a loan lies in maintaining good credit, managing debts responsibly, and demonstrating financial stability. Even if your initial application is denied, alternative options—such as negotiating loan terms or addressing specific risk factors—may still lead to approval. By understanding the criteria lenders use, you can take proactive steps to strengthen your financial profile and make informed borrowing decisions that align with your long-term financial goals.

Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here.  Click here to sign up for our weekly newsletter with the latest economic news.

Source:

Broadridge Investor Communication Solutions, Inc. prepared this material for use by Scarlet Oak Financial Services.

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Scarlet Oak Financial Services provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.