February is new agent month In Inman. Follow us as we dive into the tools, techniques, and tips you need to survive and thrive in 2024.For curated content created specifically for first-year agents, be sure to subscription to our weekly newsletter, Base.
While most home buyers consider saving for a down payment to be the most challenging part of buying a home, getting approved for a mortgage remains a significant hurdle for many.
But it doesn’t have to be a permanent setback. A savvy real estate agent can be as valuable an ally to a potential buyer as a compassionate loan officer. (In some states, agents can be licensed as mortgage loan officers.) Let’s talk about some of the most common ways agents help clients overcome their mortgage challenges.
There’s something wrong with their credit score
Generally speaking, buyers need a credit score of at least 620 points to be approved for a mortgage, but some loan programs will accept credit scores as low as 500 points.
Encourage your clients to check their credit scores before submitting a mortgage application to make sure they meet the minimum requirements. If they don’t, reassure them that it’s fairly simple to improve their credit score.
Before they undertake comprehensive credit repair, they are advised to carefully review their credit report and look for errors. If there are false accusations – perhaps due to reasons such as identity theft – encourage them to ask for a correction.
Credit reporting agencies calculate credit scores using a variety of factors, such as the length of your credit history, total credit usage, how recently a new account was opened, and the frequency of on-time payments. Tell your customers not to delay payments or open any new credit accounts until the sale is complete.
Another thing that can help improve their score is adjusting their credit utilization ratio. This refers to the amount of total available credit they are using. Lenders don’t like high ratios. Paying off some debt, such as a credit card balance, is a quick way to lower your credit utilization ratio and improve your credit score.
If your client has too little credit history to get approved, let them know they can still get approved if they build non-traditional credit. This involves notifying the credit bureaus of long-term payments, such as rent, utilities or insurance. If they are unable to build such credit, encourage them to explore credit development products, including certain credit-building cards.
Past Bankruptcy or Foreclosure
If your client has experienced a foreclosure or bankruptcy in the past few years, it may be difficult for them to get a mortgage before waiting a certain amount of time. Conventional mortgages typically require a waiting period of three to seven years for foreclosure.
For bankruptcies, the waiting period ranges from two to five years. If your client becomes bankrupt due to special circumstances such as a job loss, medical bills, divorce, or other serious family breakdown, you will have to wait a shorter period. Remember, if your client wants to claim one of these extenuating circumstances, they must provide evidence.
Unfavorable debt-to-income ratio
Lenders want your expected monthly mortgage payment, plus all your debt payments, plus any other financial obligations, such as alimony or child support, to be equal to up to 50% of your income. Depending on certain factors, the ratio may have to be as low as 36% or their mortgage application will risk being rejected. The ideal debt-to-income ratio is about 28%.
Of course, fixing a debt-to-income ratio means adjusting debt or income. Paying off debt such as credit cards or reducing your payments by refinancing your student loans are two ways to reduce your debt. When it comes to income, anything that can increase your income will help. This could mean getting a second job or getting a big raise at work.
If your client is doing some back-of-the-envelope math to calculate their future home payment, make sure they know that number is about more than just their mortgage payment — the lender is also calculating fees like insurance, homeowners association fees, and property taxes .
unprocessed assets
Buyers need a lot of money for a down payment and closing costs, and lenders want that money to “matter.” This means they want the money to have been in the buyer’s bank account for at least 60 to 90 days before closing.
For understandable reasons, having large sums of money suddenly appear in a buyer’s bank account shortly before they apply for a mortgage makes lenders uncomfortable. The money could come from undisclosed loans or even from illegal sources. Either way, it undermines their assessment of their clients’ financial stability.
This doesn’t mean your client can’t use a gift from a family member to finance a down payment. This is a common and accepted practice. But make sure they have the proper documentation to show the lender where the money came from. Also let them know that certain types of funds, such as employee bonuses and tax refunds, may be exempt from the seasoning requirement.
Sub-optimal down payment
While conventional wisdom holds that buyers should put down 20% on a home, this isn’t an ironclad requirement for all mortgages. But the more money buyers can put down, the better their mortgage application will look to future loan officers.
Let your clients know that if they can save more money, they’ll qualify for a better interest rate, and doing so will improve their chances of getting approved. Encourage them to ask for gifts from family members or direct them to fund programs to help homebuyers.
Make sure they know that if their down payment is less than 20%, they will have to pay Private Mortgage Insurance (PMI) until they accumulate 20% equity.
Luke Babich is smart real estate in St. Louis.contact him Facebook or Twitter.
