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5 Tips for Shepherding Clients Through Mortgage Challenges

Buyer demand is still robust, but affordability challenges can make it harder for clients to qualify for financing, Here's how to help.

Although most buyers think that saving for a down payment is 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 prospective buyer as a sympathetic loan officer. (And in some states, agents can get licensed as mortgage loan officers.) Let’s touch on some of the most common ways that agents can help their clients overcome mortgage challenges.

Issues with their credit score

Generally speaking, a buyer will need a credit score of at least 620 to be approved for a mortgage, though some loan programs will accept a score as low as 500.

Encourage your client to check their credit score before filing their mortgage application, to make sure they meet the minimum requirements. If they don’t, reassure them that it’s fairly simple to bring their credit score up.

Before they undertake full credit rehabilitation, advise them to carefully review their credit report and look for mistakes. If there are erroneous charges — perhaps as the result of something like identity theft — encourage them to demand a correction.

Credit bureaus calculate a credit score using several factors, like the duration of credit history, how much of their total credit is being used, how recently they’ve opened new accounts, and how often they make their payments on time. Tell your client not to make any late payments or open any new credit accounts until the sale has gone through.

Another thing that can help improve their score is to adjust their credit utilization ratio. This refers to how much of their total available credit they’re using. Lenders don’t like a high ratio. Paying off some debt, like credit card balances, is a quick way to lower a credit utilization ratio and improve a credit score.

If your client has too little credit history to be approved, let them know they can still get approved if they establish nontraditional credit. This involves notifying credit bureaus of long-time payments, like rent, utilities, or insurance. If they can’t establish this type of credit, encourage them to explore credit development products, including certain credit-building cards.

Past bankruptcies or foreclosures

If your client has had a foreclosure or bankruptcy in the past few years, they may have trouble getting a mortgage until they’ve waited a certain amount of time. For foreclosures, conventional mortgages usually require a waiting period of three to seven years.

For bankruptcies, the waiting period is two to five years. Your client could only have to wait out the shorter end of that period if their bankruptcy has special circumstances like job loss, medical bills, divorce, or another serious family disruption. Keep in mind that if your client wants to claim one of these extenuating circumstances, they’ll have to provide proof.

An unfavorable debt-to-income ratio

Lenders want the total of your prospective monthly mortgage payment, plus all of your debt payments, plus any other financial obligations like alimony or child support payments, to equal less than 50 percent of your income, tops. Depending on certain factors, that ratio may have to be as low as 36 percent, or they risk rejection of their mortgage application. An ideal debt-to-income ratio is around 28 percent.

Fixing a debt-to-income ratio, of course, means adjusting either the debt or the income. Paying off debt like credit cards, or reducing payments by refinancing student loans, are two ways to bring down the debt side of things. On the income side, anything that increases your income will help. That 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 house payment, make sure they know that number isn’t just their mortgage payment — the lender will also lump in costs such as insurance premiums, homeowners association fees, and property taxes.

Unseasoned assets

Buyers will need a significant amount of money for their down payment and closing costs, and lenders want that money to be “seasoned.” This means that they want this money to have been in the buyer’s bank account for at least 60 to 90 days before closing.

A large amount of money abruptly appearing in a buyer’s bank account shortly before they apply for a mortgage makes lenders uncomfortable, for understandable reasons. That money could have come from an undisclosed loan or even illegal sources. Either way, it undercuts their assessment of your client’s financial stability.

This doesn’t mean your client can’t use, for example, a gift from a family member to cover their down payment. That’s a common and accepted practice. But make sure they have the proper documentation to show their lender where that money came from. Also let them know that there are certain types of money, such as employee bonuses and tax refunds, that are exempt from seasoning requirements.

A suboptimal down payment

While conventional wisdom says buyers should put 20 percent down on a home, that’s not an ironclad requirement for all mortgages. But the more money a buyer can put down upfront, the better their mortgage application will look to prospective loan officers.

Let your client know they’ll qualify for a better interest rate if they can put more money down, and that doing so will improve their chances of approval. Encourage them to seek out gifts from family members, or steer them to grant programs that assist homebuyers.

Make sure that they know that if they put less than 20 percent down, they’ll have to pay for private mortgage insurance (PMI) until they’ve built up 20 percent equity.

By Luke Babich

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