Questions Loan Underwriters Ask - Part 2

As part of securing an aircraft loan, an underwriter will need to review the following: 1.) Credit Application, 2.) Credit Report, 3.) Cash Flows, 4.) Net Worth, and 5.) the Aircraft information itself. As a part of an educational series, we are addressing each of these components separately and reviewing some of the questions the lender tries to answer through analysis of a client's credit package. This should provide some insight into what a loan officer is trying to accomplish by requesting certain information.

In this article, we'll discuss an applicant's Credit Report:

1. What is the client's Credit Score? Each lender has a set of lending policies/ credit policies within which they must operate. Often times, this credit policy outlines the minimum credit score acceptable to the financial institution. The average credit score in the US varies by credit bureau, but currently ranges from 692 to 723. In the late 1990s, the FDIC (the auditor of federally-insured banks) issued a memorandum identifying a credit score of 660 as a break-point between risky and non-risky borrowers. Lenders were still able to lend to borrowers with lower scores, but needed to provide documentation and a good explanation when the loan was written below this level. The same situation applies today (although lenders are a bit less likely to make exceptions), but a credit score of 700+ is what most aircraft underwriters are looking for in today's economy.

While mortgage and credit card companies may vary their rates depending on the credit score, you will not often see a variance in rate offerings based on a clients' credit score with an aircraft loan, as it is a very niche market and all borrowers are typically required to be A-credit quality.

2. How does the applicant manage their credit (payments)? The most important part of the credit report is information about the customers' payment history, as 35% of an applicant's "credit score" is driven from payment history. Do they pay their obligations on time? Historically, have they shown they pay their debts within the terms as agreed with the creditor? The credit report gives a 7-year payment history and ideally, underwriters are looking for minimal delinquencies. Specifically, lenders are looking at the most recent two years' payment history, as this has the greatest impact on the credit profile. If there are more than a hand-full of recent late payments, lenders worry about the reliability of the applicant regardless of their current income level or job title.

The credit report also reveals other significant financial information regarding the applicant's credit history - tax liens, legal judgments, and bankruptcies. Even if the credit score is satisfactory, a bankruptcy, unpaid tax lien, unresolved judgment, or other large blemish may disqualify the applicant.

3. What is the debt-load and what type of debt do they have? The 2nd most important element of the credit report (30% of the score) revolves around how the applicant manages their credit - the amounts owed relative to the credit extended. This may include the total amount of credit extended and the type of accounts. Since the credit report breaks down each obligation separately, it gives a good sense of the types of debt the customer has. Mortgage? Car? Home equity line? Revolving credit card debt? Credit is typically organized into real estate, installment, or revolving debt, and analyzed in these three categories. Generally, keeping revolving balances low (i.e. credit card debt) relative to the total balances available will improve your score. The underwriter will also take debt-load into account for the analysis of the customer's available cash-flow for the purchase.

4. What experience does the client have with managing credit? Do they have comparable credit? Since aircraft are generally an expensive purchase, underwriters use the credit report to get comfortable with the customer's ability to handle this level of debt. Specifically, has the client managed a debt at or above the same size as that requested for the aircraft loan? In most cases, this is covered with the client's home ownership, as it is often the largest debt held by an applicant, and usually exceeds the loan amount. In addition, a lender is looking at general credit - length of time with managing the specific credit accounts - which can comprise up to 15% of an applicant's overall credit profile. In a nutshell however, it may be more difficult for an underwriter to approve a loan without a history of comparable credit.

5. Has the Applicant been attempting to secure a lot of new credit recently? There are 3 credit bureaus (Equifax, Experian, and Trans Union). Historically, local bankers would only report to their local credit bureau, or just one of the bureaus, which is why a lender is more apt today to pull all three bureaus to get a complete credit history. Each of the 3 bureaus address inquiries differently, but generally the bureaus feel that a client attempting to secure a lot of new credit - and varying types - at the same time presents a "risky" credit profile. As backup, FICO reports that "statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports". However, exceptions are made for clients rate-shopping within a 30-day window for the same types of credit (FICO is currently extending this to 45 days).

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