- The U.S. average credit score is 687, well under the 741 average had by mortgage borrowers in Q1 2017.
- Although it’s difficult to be prescriptive when helping buyers restore financial credibility, there are many solutions available.
- If you have time, mold buyers into the clients they need to be.
While widespread inventory shortages may lower a client’s chance of finding their dream home today, poor credit can take this opportunity off the table altogether. According to Experian’s latest compilation of credit profiles, the U.S. average score is 687, well under the 741 average had by mortgage borrowers in Q1 2017.
The homebuying process can be a grueling one not only for you as a real estate agent, but for your clients as well. The end result — a new home and launchpad to building wealth — oftentimes more than makes up for the nerve-wracking loan approval process, endless home searching, self-negotiations, doubt and frustration along the way. But what happens when you can’t get your clients past the loan approval?
Many agents are able to qualify buyers before the first showing, which is ideal but not always possible. Chicago agent Mark Quesada says, “This is not an option with 30 to 40 percent of my leads: I have an agreement that I will meet them in person and show a home before discussing financials with a referral company.” Quesada’s dilemma spawned a discussion in this Facebook group for real estate agents, who were eager to offer up their advice.
The consensus was that in these cases, it’s always best to prepare yourself for being the bearer of bad news, and some agents can gain client loyalty (and referrals) simply by being a resource.
Any conversation centered on financial troubles or credit issues can be difficult to navigate, but the right approach can transform a seemingly hopeless situation into a growth opportunity for you and a learning opportunity for those at an economic impasse.
Although you may want to avoid a face-to-face meeting, it’s in everyone’s best interest to invest time in discussing the matter. Buyers will appreciate the fact that you put them first even though things didn’t work out, and your commendable bedside manner might inspire them to send friends and family your way.
“Always have a face-to-face,” said New Jersey-based Realtor Christine Bender. She makes sure the lender gives her buyers a time frame and always keeps the conversation positive. “I have long-term clients who I closed after they had to clean up their credit,” she added.
Be delicate, but don’t beat around the bush or stonewall. Your clients need you in this moment — probably more than they needed you before — and courteous honesty will help them swallow that bitter little pill.
What kind of agent are you?
Some agents have it all figured out: Their sphere is huge and wealthy, their referral program is solid, and low credit scores are unheard of among their client base. Other agents cater to a wider demographic; their clients span the income spectrum, and they dedicate their time to a different kind of customer service that involves advising, nurturing and even teaching.
If you don’t have time to devote to clients who can’t get approved, the best thing to do is refer them to a trusted lender who will work with them. Reach out to them periodically, ask if they are working on their credit, and let them know you’d love to work with them when the time is right.
Other agents simply prefer to circumvent the hard part: “I would definitely have the lender ‘break the news,’ but then follow up with a phone call,” said Ohio-based Realtor Shannon Cannon. She lets buyers know she’d love to work with them in the future, stays in touch and checks on their progress.
If you do have time, mold these buyers into the clients they need to be. Work with them yourself rather than handing them off or leaving them on their own, and strategize a game plan that ends with them in a new home.
Discussing the solution
Although it’s difficult to be prescriptive with all buyers when attempting to restore financial credibility, many solutions can be implemented across the board. California Realtor Trish Sohle says, “I sit down with [buyers] and consult for a future purchase. I’ll talk about how credit works, what an ideal profile looks like and what the ideal loan file would look like. I explain debt-to-income ratios and show them how to track their progress.”
Credit restoration is possible, but the duration of time it takes is dependent upon your buyers’ determination and discipline. “It’s disappointing for them, but everyone has to start somewhere,” Sohle added.
Buyers can start taking steps to improve their credit immediately. Advise them to:
1. Request a credit report. A careful analysis of a buyer’s credit report can sometimes reveal minor yet detrimental errors. They should check the balance owed on each open account against their latest statements to ensure accuracy, and make sure any late payments or derogatory marks are noted correctly. Any erroneous information should be disputed with the credit bureaus immediately.
2. Reduce their debt-to-income (DTI) ratio. Debt can quickly reach unmanageable levels without mindful monitoring. To calculate this ratio, buyers can add up the payments made toward their debt in an average month and divide that total by their gross monthly income.
For example, if you make $6,000 a month, and all your bills total $4,500, your DTI calculation would be: 4,500 divided by 6,000, which equals 0.75, or 75 percent.
A 43 percent DTI is the highest a borrower can have and still be approved for a mortgage; anything above that is a red flag that tells lenders that a buyer is high risk.
Some tips for decreasing your DTI include:
- Avoid making any large purchases or taking on any additional debt
- Increase your credit card payments to get the balance paid down faster
- Consolidate your debt, if possible, by moving everything to a low or no interest credit card
3. Save money. A healthy savings account is one of the cornerstones of financial responsibility and independence, but stashing pennies is a lot easier said than done, and you’ll need the discipline of a Navy SEAL to put money away rather than spend it on entertainment and other non-essentials.
Some tips for saving money include:
- Cutting spending. Ask potential buyers: Are you craving your favorite Mexican restaurant too many times per month? Addicted to Starbucks? Spend tons of money at the dry cleaners? Is movie theater popcorn and candy draining the account every weekend? Despite how buyers may feel, these expenses are not necessary. Advise them to go the grocery store and stock up on items to make their favorite foods at home, buy a quality laundry detergent and start using the gentle cycle and hang-drying clothes, and rent a movie instead of being tempted to spend $40 on junk.
- Set a budget. Fifty-six percent of American adults live without a budget. Potential buyers can contribute to lowering that percentage by figuring out what they need to spend each month and using that information to determine their budget. If they decide $350 a month is what they need to spend on groceries, they should stick to that number (and not go a penny over!)
- Pay yourself first. Financial illiteracy is a problem yet to be solved, but many people could improve their personal finances if they took this piece of advice to heart: Before paying the bills or making any purchases, put money into your savings account. Thirty-nine percent of American adults have absolutely no non-retirement savings; if you don’t have a savings account, open one. You are your most important creditor, and you owe it to yourself to build up the money you work so hard to earn.
4. Pay your bills on time. Advise buyers to familiarize themselves with their bill cycle and readjust due dates if possible, set up reminders on their phone and take advantage of auto-pay when it’s available. Collections and late payments signify irresponsibility and unpredictability; if buyers want to speed up the credit repair process, timely payments are a must.
Not every buyer can wait for their credit to improve. For those who can’t get approved but want to sprint to homeownership rather than walk to it, there are alternatives.
“If a buyer doesn’t qualify, you could suggest www.homepartners.com,” advised Florida Realtor Barbara Schmal. Home Partners has a Lease with a Right to Purchase Program that “provides three to five years of rent certainty with an initial financial commitment of just one year,” according to the site. This is a costly option, as rent prices under this type of program are typically set well above market value.
Another option is the Neighborhood Assistance Corporation of America (NACA). This organization provides loans based on your ability to pay bills, not your ability to maintain a high credit score. Buyers are asked to attend a seminar and schedule a meeting with one of the organization’s loan officers. Initial meetings are typically scheduled several months out to give buyers enough time to gather the documents required to apply and save about $4,000, which goes toward the purchase of the house.
If your bank account has been in excellent standing — no late payments, no questionable deposits or withdrawals, and no other shifty money movement — you’ll get approved for a loan regardless of your credit score. The rules and maximum loan amount vary by state, so your buyer would have to inquire. And another thing — buyers who get a loan through NACA have to work with a NACA agent, so you’d have to forfeit them as your clients.
Handling buyers who don’t qualify for a mortgage doesn’t have to be tricky or complicated. With the right approach and an inventory of valuable knowledge and advice, you can still find a way to help them achieve homeownership.