FICO credit scores are used by most lenders to determine credit risk and the interest rate that borrowers will be charged. Your clients have three distinct FICO scores from each of the three credit bureaus — Experian, TransUnion and Equifax.
Understanding the components of your client’s FICO score will allow you to convert your dead leads into constant revenue generators. Telling your client their FICO score is too low to secure funding should never be your last point of contact with that individual.
As a commercial mortgage broker, you know there is no shortage of nonbankable and hard-to-fund clients. There is, however, a shortage of brokers willing to offer their time and knowledge to a client who isn’t fundable now but may be in the near future. By understanding the five major components used to determine your client’s FICO score, you will become a resource for your client beyond their current funding needs.
Applying the sweat equity to build and nurture a relationship can prove to be more lucrative than neglecting your dead leads. Consider the potential for future transactions and referrals from your client that you would have otherwise let walk away.
Payment history
Your client’s payment history is the most important variable in their FICO score, which was pioneered by Fair Isaac Corp. Payment history comprises 35 percent of the overall algorithm formulated by FICO to calculate your client’s overall credit score. This is because it is believed that long-term payment behavior can be used to project future repayment of loan obligations.
The three credit bureaus factor in both revolving credit and installment loans when calculating the payment-history portion of your client’s credit score. Revolving credit is considered credit that is not issued in a predetermined amount. Examples include credit cards or a home equity line of credit. Installment loans are loans that are repaid in fixed monthly amounts and the borrowed sum doesn’t change over time. Examples include mortgages and auto loans.
Mortgage lenders will give your client’s installment- loan repayment history more weight because mortgage repayment will be of significant interest to the lender. In fact, in some cases, lenders will still extend terms to clients with a less-than-desirable FICO score due to derogatory marks on revolving credit accounts, as long as installment-loan accounts are paid back on time.
Although the ill effects of late loan payments stay on your client’s credit report for several years, the easiest way to positively affect this portion of their credit history is by ensuring future payments are made on time. Alternatively, your client has the option of contacting the creditor or credit bureaus directly to dispute these delinquencies, but results may vary, and this option should only be exercised if there is a genuine mistake on your client’s report.
Credit utilization
The second most important component of your client’s credit score is their credit utilization — or the ratio of their credit balance to their credit limit. Credit utilization comprises 30 percent of your client’s credit score and is the easiest to manipulate to boost scores in the short term. When your client utilizes a high percentage of available credit, the credit bureaus view this as an indicator of an overextended and high-risk borrower, even though this may not be the case.
So, what’s the sweet spot? It’s generally accepted that the lower the credit utilization, the better — although there’s an argument that being in the 10 percent to 30 percent utilization range will result in better scores. As mentioned earlier, credit utilization is the easiest component to manipulate. Following are some ways to improve the ratio.
Pay down open accounts. This one may seem obvious, but if your client has the liquidity to do so, one of the easiest ways to boost their credit score is to advise them to pay down their revolving-credit balances. Credit issuers report to the credit bureaus monthly, so by simply lowering outstanding credit-card or other credit-line balances, your client may quickly become fundable.
Ask for a credit-line increase. If your client has established tradelines and a good relationship with the credit issuer, then they are likely to extend a larger credit line to your client. This will inherently lower their credit utilization so long as spending is not increased as well. As a broker, you must be vigilant when advising your borrower to utilize this tactic. Some credit issuers may conduct another credit inquiry when a borrower asks to increase their credit limit, so be sure to do your homework as too many hard inquiries can have adverse effects.
Other factors
The third most important component of your client’s credit score is the length of their credit history. This comprises 15 percent of their total score and is by far the most difficult component to alter.
A majority of your clients will be seasoned investors and already have established credit, so this component of their credit score will be a nonfactor. One measure that FICO considers is average length of credit accounts; therefore, advise your client against opening new tradelines as you work to increase their score.
A fourth variable is the new-credit component of your FICO score. It accounts for a mere 10 percent of your client’s overall credit score, but it can make a difference on a month-to-month basis. The new-credit component takes into consideration the following: number of new accounts, time since opening new accounts, number of requests made and the number of inquiries due to rate shopping.
It’s best if your client does not open new accounts or rate shop when attempting to build up their credit score, in order to avoid unnecessary credit inquiries. This can be the difference between a 675 and a 680 FICO score, a spread that for some lenders may entail as much as a 0.25 percent rate difference.
The final component is the credit mix, which comprises 10 percent of your client’s FICO score. Credit mix simply refers to the different types of credit being reported: credit cards, student loans, auto loans and mortgages, to name a few. Your client’s credit mix isn’t easily adjusted and merely paints a picture of their overall credit and financial health.
Any seasoned investor will typically show a diverse credit mix, and this component will be a nonissue. A unique scenario might include working with a green-card holder who may be in the process of establishing a credit background in the United States.
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Now that you understand the basic components of your client’s FICO score, utilize them. Nurture your otherwise dead leads and turn them into revenue generators. If your client is unhappy with proposed loan terms or flat out doesn’t qualify, you now have the tools to be a catalyst in preparing them for more appealing financing options in the future.
Your lead-generation expenses can be costly. Don’t let your potential clients walk away without exhausting all your resources. Be the commercial mortgage broker who will go the extra mile for their clients. Your efforts will be recognized and rewarded with increased client referrals and transactions.
