Inside the Homeowner Loan Approval Process: What Contractors Need to Know

Financing plays a critical role in today’s home improvement sales. The loan approval process, also known as underwriting, determines whether a homeowner qualifies for a loan and on what terms. It’s basically how a lender assesses risk. While contractors aren’t responsible for loan decisions, understanding how it works can help prevent delays, improve customer conversations, and increase close rates.

Here’s how the loan approval process typically works:

Application ReviewThe lender looks at basic information the homeowner provides, such as income, employment, and the requested loan amount.

1. Credit evaluationA credit score, payment history, and existing debt help the lender understand how reliably the homeowner has managed their credit in the past.
2. Affordability checkLenders assess whether the homeowner can reasonably afford the monthly payment, often by reviewing income compared to current debt obligations, also known as debt-to-income ratio.
3. VerificationInformation in the application may be verified through credit bureaus or other data sources to confirm accuracy.
4. Risk assessment & decisionBased on all of this, the lender decides to approve, decline, or approve with specific terms, such as the interest rate and loan amount.

How Credit Scores are Determined

Credit scores are a very important component in the loan approval process. They are a way lenders can quickly gauge how likely someone is to repay a loan. They’re built from a person’s credit history and expressed as a number, most commonly on a 300–850 scale.

The score is determined by factors such as amounts owed, new credit, length of credit history, credit mix, and payment history.

Based on your customer’s credit score, they will fall into one of several categories. Those categories directly influence which lenders can approve the loan and how flexible the financing options will be. Credit score ranges for these classifications vary across lenders and organizations, but they generally fall from Superprime (or Excellent) to Subprime (or Poor).

FICO is one of the most used credit scores. They categorize scores this way:

• Superprime (720 or above)
• Prime ( 660-719)
• Near-prime (620-659)
• Subprime (580-619)
• Deep subprime (below 580)

Near-Prime Lenders Allow You to Offer Financing to More Customers

While many customers fall into the Prime or Superprime categories, others may have fair credit or are trying to rebuild their credit. In fact, about 12.2% of U.S. consumers fall into the near-prime credit tier, representing millions of homeowners who will not qualify for Prime financing.

Even homeowners with scores around 660 can slip into a lower tier due to factors like a missed payment or a recently closed account, such as a Home Depot store credit card. Near-prime lenders serve borrowers facing these types of credit challenges. Partnering with a near-prime lender allows you to support more customers without pushing them into unfavorable options. These homeowners may not qualify for prime financing, but they also don’t need to resort to high-interest credit cards or lease-to-own programs. Near-prime lenders, like FTL Finance, help bridge that gap by offering approval paths with more reasonable terms.

How Waterfall Lending Improves the Loan Approval Process

Now that we’ve discussed the different types of lenders and credit tiers, the next question is how to efficiently connect homeowners with the right financing option. That’s where waterfall lending comes in.

Waterfall lending is an approval process lenders like FTL use to help more applicants get approvals. There is only one application and one credit pull, but multiple lenders may see the application throughout the approval process.

At the top of the waterfall, a prime lender reviews the application. If they can’t approve it, they send the application to the near-prime lender. If they can’t approve the application, the application continues down the waterfall to the subprime lender. The customer will receive an approval from the best match. This saves time and ensures your customers get the best terms possible.

Waterfall lending is especially helpful for homeowners who need a system installed quickly or who don’t have enough equity to qualify for a home equity loan. This streamlined approach increases approval rates, reduces friction at the point of sale, and helps homeowners move forward faster, providing much-needed relief during what is often a stressful situation.

Guiding Your Customer through the Loan Approval Process

While you are not the one managing the loan approval process, it’s important for you to understand how it works so you can help your customers.

We recommend introducing financing early in the conversation. Let customers know right away that you offer financing - whether you think they will use it or not.

Be aware that financing isn’t just for full system replacements. With today’s repair-focused market, many homeowners are relieved to know financing can also cover emergency repairs.

When you discuss costs with your customers, focus on monthly payments, not just total costs. This strategy will help alleviate sticker shock.

Ultimately, access to financing can mean the difference between a homeowner moving forward with a project or not. Understanding the loan approval process can help you set realistic expectations for your customers, remove awkwardness from financial conversations, and keep projects moving forward, even in a tight economy.