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Credit scoring is a method of calculating the reliability of users who require a loan or a loan to purchase a property. It is therefore a tool available to banks or other active financial companies for the provision of loans. These subjects need to quantify the risks of insolvency of citizens who apply for funding. Once it was the director of the branch who was responsible for assessing the customers’ financial reliability and choosing whether to pay the amounts requested, but today, given that banking services have moved online and citizens want more clarity, ways of introducing them have been introduced. more precise calculation, just like credit scoring.
This system of calculating the creditworthiness
Often based on the use of specific software, which, through an algorithm, is able to clarify the risk of insolvency based on a series of information on the applicant and the characteristics of the loan. In any case, bank staff will have the last word about the possibility of providing the loan. This method has prevailed above all in the area of real estate purchases: the score for the mortgage is used precisely to determine whether the amount requested is sustainable for the borrower.
What data should be taken into account when calculating credit scoring for a mortgage?
First of all, the credit history of the applicant is taken into account, considering for example whether in the past he was reported as a bad payer. Furthermore, some information is taken into consideration, such as the geographical area in which the property to be purchased is located and the type of house (for example if it is a first home, the calculation will be more favorable), the age of applicant and the type of employment relationship: in the latter case the type of contract is assessed (always better a permanent employment contract , with a stable pay slip) and the years of activity. It is then defined if the mortgage is directed to the purchase or renovation of the house (the first option is preferable).
Then, the most important considerations come into play, which concern the sustainability characteristics of the loan. The ratio between the loan amount and the value of the property is then calculated, but also the ratio between the single installment and the total amount of the loan. Finally, the ratio between the value of the loan and that of the annual income is counted: the lower it is, the more sustainable the loan will be, given that it will weigh less on the pockets of the applicant, who will be able to repay it more easily. In this way, credit scoring provides an element of clarity that is very useful for both banks and their customers.