The
days of qualifying for a loan just because you have a pulse are
obsolete. Today's real estate transaction is dependent on numerous
aspects; buyer income, debt ratio, property value, and credit. A
successful realtor will have an understanding of how each of these
categories work, intertwines with one another, and how that
interaction ultimately affects the success of the transaction.
Income
is the first important factor in determining whether or not approval
from the bank is likely. It's obvious that if an individual does not
earn enough income to pay back a loan then no matter what the credit,
debt, and appraisal might be, there will be NO approval from the
bank.
Second
to consider is debt. If the buyers debt; credit cards, student loans,
car loans, and/or the pending mortgage loan, are higher than the
income affords, the bank will not give approval.
As realtors, you already know how important the value of
a property factors into the approval of a mortgage, so we will move
along to the fourth category, credit, and its impact on the
decision-making process.
Within the past five years the economy has drastically
changed. With so many properties decreasing in value across the
country and a great number of homes going into foreclosure and short
sale, banks have experienced huge losses. The result has left banks
gun-shy when deciding to approve financing and increasingly more
dependent on an individual's credit history.
Even if a buyer has the income to cover the mortgage and
other debt owed, and the property appraises at the right value, the
lender still cannot calculate the risk of the individual and remains
at a loss of knowing whether or not the holder will make timely
payments. Credit is the only window that a bank can view to see the
track record of payments that an individual has had over the last
7-20 years. In addition to reviewing a buyer's payment history, the
bank can use this insight to ultimately decide whether or not to
approve an individual and even the interest rate at which to charge
the loan.
The first important fact that realtors must be aware of
when it comes to credit is that not all scores are created equal.
Bankers mostly use the Fico Score which ranges from a 300-850.
The higher the score the more attractive the applicant is to the
bank. However, there are many other scores besides Fico that are
sold online to unsuspecting consumers who are unaware that there are
differences. For example, if a consumer orders a Vantage Score and it
is a 780 it may actually translate into a 650 Fico score, which is
quite low. The Vantage score could be as much as 150 points
higher than a Fico, since it ranges from a 501-990 (it also has
letter grades). Therefore, the consumer might be left thinking
they have a great 780 score right up until they need loan approval
and the bank denies them.
One client, referred to us by a realtor, was looking to purchase a
property in Long Island. He started looking for properties
after he ordered his "Credit Score" online and was pleased
to find it was a 790. When he met with the agent he bragged
about his excellent credit score and he was sure it would be a breeze
to get loan approval. After showing homes for 3 months the
realtor convinced her client to get a pre-approval letter. While the
banker was gathering information to send the letter the buyer found a
property he and his wife loved. After the agent made the first
offer the client got a phone call from the banker telling him his
credit score was a 650 which meant he could not qualify for the loan.
The buyer was shocked and did not understand the difference in
score. When analyzing the credit with the banker it was clear
he had some credit issues. The realtor immediately referred the
client to us to see if we could improve the credit score. The client
had a few small collections and a late payment on a credit
card. While we were able to improve the credit score by 100
points, it took over a month and by the time the buyer went back to
the seller there was an offer accepted already. This was very
disappointing to both the buyer and the agent. His score
problems would have been addressed much earlier if he had been
informed that the score he needed to view was the FICO score and not
the Vantage score.
This becomes quite confusing to consumers since most
sites do not display in neon lights that the score being purchased
may be the WRONG one. As realtors this information gives you a
great opportunity to provide your potential buyers with valuable insight
and let them know if they want the Fico scores they must be purchased
online at www.myfico.com.
The sooner your buyers see their credit scores the faster we can
tweak or work to improve them, and the more opportunity they will
have for a successful purchase at the best rates.
This Newsletter
article will be the first of many geared toward real estate
professionals focusing on credit information. These articles
will be sent every 2-3 weeks and agents are welcome to email me with
credit topics they would like to learn about.
"Great credit brings great
opportunity!!"
Copyright 2011
