Background

In my 15 years advising borrowers and underwriting small-business loans, I’ve seen lenders move from score-first decisions to layered underwriting. The 2008 crisis and advances in analytics pushed banks and nonbank lenders to combine credit scores with income verification, cash-flow analysis, and automated underwriting systems (e.g., Fannie Mae’s Desktop Underwriter) to reduce false positives and better price risk (see Fannie Mae and Federal Reserve research).

How lenders evaluate risk in practice

  • Income & employment verification: Lenders verify paystubs, W-2s, tax transcripts, or bank deposits for self-employed applicants. Documented, stable income lowers perceived risk (IRS transcripts can be required for complex self-employed cases: https://www.irs.gov).
  • Debt-to-income (DTI): DTI compares recurring debt payments to gross income. Many conventional lenders prefer DTI at or below ~43% for routine approvals, though program rules and compensating factors can raise allowable DTI (see CFPB guidance on affordability). For mortgages, lenders look at both front-end (housing) and back-end (total) DTIs.
  • Payment history and credit-file details: Timely payments, low recent delinquencies, the age of accounts, and low credit-utilization ratios (aim for <30%) materially affect underwriting decisions beyond the headline score.
  • Account mix and recent behavior: A mix of installment and revolving credit, and stable balances, signal diversified credit experience. Recent large balance increases or dozens of new accounts can raise red flags.
  • Public records and collections: Judgments, tax liens, bankruptcies, and collections typically increase perceived risk and can trigger manual underwriting or denials.
  • Alternative data and thin files: For thin- or no-file borrowers, lenders may use bank-transaction data, rent and utilities payment history, and employment data to evaluate creditworthiness — a growing trend to expand access (see our article on alternative data).
  • Automated vs. manual underwriting: Automated systems score and triage applications; manual reviews allow lenders to weigh compensating factors (large down payment, cash reserves, stable industry) when a raw score looks marginal.

Real-world examples

  • A borrower with a 650 FICO but steady employment, a 20% down payment, and low DTI can qualify for competitive mortgage pricing after a manual review.
  • Conversely, a 760 FICO with multiple recent late payments or a new high-balance credit card may see less favorable offers because behavior changed recently.

Who is affected

All borrowers are affected, but the difference is biggest for: self‑employed or gig workers (income documentation matters); thin-file borrowers (alternative data helps); and those with midrange scores where compensating factors can swing approval or pricing.

Actionable steps to improve your underwriting profile

  1. Lower credit utilization — aim for under 30% and pay down large card balances before applying.
  2. Reduce DTI — pay down debts or increase documented income (overtime, bonuses, consistent bank deposits).
  3. Fix errors — review your credit reports at AnnualCreditReport.com and dispute inaccuracies quickly.
  4. Stabilize recent activity — avoid opening new accounts or taking on large balances in the 60–90 days before application.
  5. Prepare documentation — have two years of tax returns and recent bank statements ready if self-employed; request IRS transcripts if needed.

Common misconceptions

  • “A high FICO guarantees approval.” Not true — lenders price and approve using many inputs; income and DTI still matter.
  • “Only FICO matters to all lenders.” Different lenders and products use different score versions (FICO vs. VantageScore) and proprietary models — see our primer on credit-score models for details.

Short FAQs

  • What matters more: FICO or DTI? Both matter; a strong score helps, but a high DTI can kill an otherwise acceptable application — many conventional underwriters use ~43% as a common guideline, though exceptions exist (CFPB).
  • Do multiple hard inquiries hurt my chances? Rate-shopping windows limit the impact for mortgage shopping (commonly treated as a single inquiry within a short window), but multiple inquiries still matter for shorter-term scoring effects.

Internal resources

Authoritative sources

  • Consumer Financial Protection Bureau — consumerfinance.gov (guidance on affordability and DTI).
  • Fannie Mae research and underwriting guides — fanniemae.com (automated underwriting & compensating factors).
  • Federal Reserve research on credit scoring and macroprudential lessons — federalreserve.gov.
  • IRS — irs.gov (tax transcripts and income verification).

Professional note and disclaimer

In my practice as a lending advisor, I’ve seen small documentation improvements and one-time debt payments change loan offers substantially. This article is educational and not individualized financial advice. For decisions about specific loan programs or to contest a report item, consult a licensed lender or financial professional.

Date and accuracy

Content reviewed for accuracy as of 2025; program rules and lender overlays change frequently — always confirm program limits and documentation requirements with the lender you plan to use.