Analyzing Risk

• 1). Review the borrower's total monthly expenses and debt obligations. Examples of basic expenses include: rent/mortgage, property taxes, insurance, credit card debt and student loans.
  
  
• 2). Verify the income of the borrower and co-borrower, if necessary. You may consider income from multiple sources, though you will only want to count income which has a verifiable history of at least two years and a high likelihood of continuation. Salary income is the most common and stable source of income, depending on the industry of the borrower. You may also look into commission and bonuses by taking the two-year average, as calculated by the borrower's federal tax returns, in addition to a written statement from the borrower's employer. If the borrower is self-employed, average the last two-years' worth of income from his federal tax returns in addition to a year-to-date profit/loss statement from the borrower's business. Other income sources to consider are payments from Social Security, insurance, pensions, trust or investments.
  
  
• 3). Calculate the total income to obligations ratio. This is calculated by adding total monthly expenses plus debt and dividing it by the total monthly income. Depending on the industry and type of loan requested, the allowable income to obligations ratio will vary.
  
  
• 4). Analyze the borrower's credit, as a factor of risk assessment, as it will show you the borrower's historical ability to repay debts. You will need to look at the status of all preexisting and current loan obligations. Revolving accounts in good standing will be a good sign of borrower repayment history. Items to look out for are collections, repossessions, foreclosures and bankruptcies. If any of these items show up on a credit report, you will need to ask for a letter of explanation for each of the items from the original creditor to see proof that the debt was settled.
  
  
• 5). Determine the amount of funds which the borrower will have available after receiving the loan and his ability to repay it after assessing the borrower's financial background. Determining the borrower's funds can be done by reviewing his cash assets, as shown on recent bank statements, in addition to viewing any stocks, bonds or mutual funds which the borrower may hold or financial gifts from family members.
  
  
• 6). Appraise the value or financial health of the proposed loan's investment in order to determine if the amount of the loan requested is valid. For example, if the loan will be used for the purchase of a house, you may need to request a property appraisal. It is likely that this has already been done, though you may request another appraisal if you are not satisfied with the valuation method of the original appraisal.
  
  
• 7). Use your firm's guidelines as final judgment on the borrower's other compensating factors. For example, if a borrower does not meet all of your requirements for credit-worthiness, he may exceed your requirements in certain areas which may compensate for a lack of good credit or long-standing income.
  
  

Possible Decisions

• 1). Give an easy approval if the borrower has met all of your credit requirements and the investment is sound.
  
  
• 2). Approve with conditions if you require more financial documentation before the loan will be approved.
  
  
• 3). Suspend the application if there are too many unanswered financial questions and more documentation is needed in order to make a decision.
  
  
• 4). Deny the application if the borrower does not meet the minimum credit requirements.