When working with inexperienced buyers, your expertise builds their confidence. Confident agents make confident clients. Therefore, your advice and knowledge about obtaining and maintaining credit to secure home financing are vital. Here are the A-B-Cs of the mortgage process, credit scores, and best practices for your clients to obtain a loan.
Get in the game early
One of your first questions to ask new buyer clients is whether they have started loan shopping. Starting the mortgage process before putting an offer on a house is crucial to successfully buying a property. The mortgage loan process is time-consuming, and the more the buyers have accomplished before making an offer, the better.
Before applying for credit, buyers should pull their credit reports from the three major credit agencies to learn their scores. According to federal law, consumers are entitled to one free credit report per year from each of the credit bureaus. Checking their credit does not count against their score, and it gives them an idea of what lenders will find.
Homebuyers should shop rates and terms, particularly when interest rates are volatile. Next, have them read online lender reviews to find out if previous customers have been happy with the service they received. Finally, your clients should contact two or three of the best companies and ask specific questions about applications, fees, and timing.
Lenders offer two types of evaluations for prospective borrowers: prequalification and preapproval. Preapproval is recommended. Prequalification is a cursory look at the buyers’ income and debt ratio, while preapproval digs deeper, pulling credit scores and looking at credit history. It is a more substantive step in the mortgage application process. If both spouses apply, the loan officer will evaluate each income, credit score, and financial profile.
The lender will then supply your buyers with a preapproval letter to show a prospective seller when making an offer. The document tells the seller that the buyers are serious prospects, not “tire kickers.”
Once the buyers’ offer is accepted, they officially complete a mortgage application for purchasing the house under contract. Now a specific, thorough mortgage approval process begins. The lender will require copies of recent bank and investment account statements, employer income verification letters, and a deep dive into past payment history.
What is the FICO score?
Equifax, Experian, and TransUnion‘s FICO scores are critical to qualifying a borrower. (FICO is an acronym for Fair Isaac Corporation). The score ranges from 300 to 850; the higher the score, the better assessment of creditworthiness.
When a couple applies, the lender will evaluate their combined capability to afford the mortgage payments. Each borrower has a FICO score, and both are considered. If just one individual applies, the weight of the decision rests on that borrower alone.
Five components make up the aggregate score. Here they are in order of weight:
- Payment history. The applicants’ payment history means the most to a potential lender. Do the applicants pay their debt obligations on time? This component is 35 percent of the FICO score.
- Amounts owed. Do the prospective borrowers have debt they can reasonably repay on time while taking on the new mortgage? The amount owed is 30 percent of the score.
- Length of credit history. How long have the borrowers been in the credit market, and how long have they had certain accounts? This is weighted at 15 percent.
- Credit mix. Do the applicants have a combination of credit obligations, such as credit cards, past mortgages, car loans, etc.? The credit mix contributes 10 percent toward the FICO scores.
- New credit. How much new credit, recently acquired, do the borrowers have? New credit is weighted at 10 percent.
Do this, not that
When your buyers apply for a mortgage, there are certain things they should and should not do.
- Do not apply for other new loans or credit of any kind. New obligations popping up while being evaluated for a mortgage will raise red flags with the lender.
- Do not make sudden large deposits or withdrawals from bank or investment accounts.
- Do not make big purchases such as cars or boats.
- Do continue to make payments on time.
- If the buyers have credit history problems, they should avoid advertised services to “fix” their credit. Credit cannot be repaired except through the diligent process of budgeting finances, paying obligations on time and reducing debt. Buyers can only fix incorrect or incomplete information on their credit scores. Each agency has a process for consumers to correct errors in reports.
- Experian offers a program called Boost, whereby utility payments count toward Experian’s scoring of the consumer’s credit. The program provides extra help improving the score, assuming utilities are paid on time.
Having complete knowledge of the lending process gives your client confidence and expedites the close of the sale.