Interest rates are low, which means borrowers are clamoring to sign mortgages with great rates. Unfortunately, many prospective borrowers fail to qualify for any loans, low rate or otherwise.
Without financial help, few people can’t fulfill their dreams of homeownership. Research from Harvard University found that a mere 36.7 percent of homeowners own their homes mortgage-free. While people with great credit can secure the loans they need, those with bad credit—and many with decent credit—find themselves locked out under traditional underwriting standards.
Today, the median credit score for people who want to purchase and live in a house is 732. In 2015, that number was 700. This doesn’t necessarily mean that credit scores have shot up across the board: more likely, it indicates that mortgage lenders are pickier about how frequently they give out loans. Those at the bottom of the credit barrel find homeownership nearly impossible, with only 0.1 percent of mortgages on starter homes in 2016 going to borrowers with scores under 620.
Unfortunately, the hands of brokers and lenders are somewhat tied. They can’t simply hand out more loans to people with bad credit. Scores exist for a reason, and if lenders were to give out money to people with colorful credit histories, they would quickly find themselves writing off major losses.
But denying a loan shouldn’t be the last interaction a broker has with an applicant. Brokers can—and should—still help the applicant in other ways.
How to help borrowers who don’t make the cut
Rather than outright deny unqualified applicants and leave them in the dark, brokers should offer a secondary service to help prospective borrowers understand and improve their credit situations.
To brokers, the science behind credit scores is straightforward. But to people on the outside of the industry (even highly educated people), credit scores are as unreadable as Egyptian hieroglyphics. They know how to make payments on time, but they don’t know what helps and what hurts. Do utility bills reflect in credit scores? What about car loans, rent, or authorized user accounts on other people’s credit cards? Brokers know; the general population does not.
Few applicants expect their mortgage brokers to talk them through the post-denial blues. Almost none expect their brokers to provide a credit improvement plan to improve their odds the next time around. However, brokers who do take the extra step could earn a client for life—and improve the odds that the client will become and remain a creditworthy person.
Brokers can provide simple advice to help borrowers get back on track:
1. Get a free credit report
Free services like Credit Karma are a good start, especially for people who don’t know much about credit. However, nothing can replace the real thing.
Brokers should send applicants to AnnualCreditReport.com to download their one free yearly credit report. This shows applicants all the same information that brokers see, much of which they might not know exists.
2. Dispute any incorrect items
Credit reports aren’t perfect, but only applicants know what should and should not be on theirs. And people with common names often find errors on their credit report. Loans, credit cards, and accounts in collections are all subject to mistaken identity.
When an applicant finds an error, he or she can file a free dispute on Credit Karma with all three credit bureaus (Equifax, Experian, and TransUnion) to have it removed. If that doesn’t work, the applicant should send a certified letter requesting verification of the debt to the company that serviced the mistaken loan.
3. Create an action plan
With accounts verified and errors removed, applicants should design a plan to improve their credit scores over time. Most of the time, this process takes at least a year or two to see significant benefits.
Applicants should address all the relevant credit factors and understand how they work. Payment history and current debt are the two biggest factors. While applicants can’t go back in time to correct missed payments, they can set up alerts to help them avoid mistakes in the future. Current debt is simpler to improve, if not always easy. Borrowers simply need to pay down their credit cards until they owe less than 10 percent of their total available credit limit.
In addition, credit age, while less important than the previous factors, still matters. Borrowers should avoid closing their oldest credit cards if they can. They should also avoid applying for credit too frequently, as hard pulls cause small dips in credit scores.
The final factor, credit types, is not worth active change. Borrowers should never open new accounts for the sole purpose of credit score improvement.
4. Dispel the myths
Brokers should also help borrowers separate the fact from fiction in credit scores. The following tips are intuitive to mortgage brokers, but not to those unfamiliar with credit:
- Credit scores do not require lots of money to improve.
- Debit cards and bank accounts in good standing do not reflect on credit scores.
- Paying a collection debt does not remove it from a credit report.
- Borrowers do not need to carry balances to build credit.
- New jobs and marriages do not affect credit scores.
The average borrower doesn’t understand how to separate credit-affecting financial activity from everything else—but brokers do. These tips might not get borrowers approved for a loan tomorrow, but they could help borrowers improve their credit and improve their odds of approval on their next application. Mortgage brokers aren’t responsible for the financial well-being of their denied clients, but brokers who take the extra step can earn customer loyalty and build positive word-of-mouth marketing.
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
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