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Guidelines vs Common Sense… Which do you use?

Mortgage Loans
In evaluating a mortgage loan applicant’s ability to pay, many lenders use the Fannie Mae guideline of around 33% of pre-tax income. If you need to be able to sell the loan, industry guidelines make sense.

If you are holding it though, how about this approach from Michele Collins, Senior Vice President of Mortgage Lending at ShoreBank in Chicago. In the April 2008 RMA Journal, she shared:

“We get applicants who are paying their loans that have current debt ratios of 45% to 60%. If we can give them a loan that reduces that ratio to 40%, it makes sense to do the loan,” says Collins. “If they can pay at 60%, why couldn’t’ they pay at 40%?”

What does she consider as well?

  • Payment history
  • Credit score
  • Their story…if there are some problems on the credit report, why?

You won’t be surprised at the payoff…customer loyalty.

“Many other banks try to steal our customers once we get their credit report cleaned up,” Said Collins. “But our customers don’t generally leave for a cheaper rate.”

Business Loans
So how does this apply to business lending? Here is my take: Guidelines get us all started on the same page and improve consistency. You don’t want a borrower to get a loan (or be declined) based on which desk she sat at.

I also get the sense that guidelines are more hard and fast at some financial institutions. If you are new to lending, or new to the financial institution, make it a priority to learn how flexible, or inflexible the guidelines are.

And if you have to turn a loan down due to guidelines…be careful that you have considered important mitigating factors like borrower history with your company. If this builder was one of the few who did not default on a spec house loan in the last down-turn, that ought to count for something.

About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at, she speaks at banking associations on risk management, lending and director finance topics.