Residential Magazine

Stuck in Quicksand

Help clients escape the money traps that could prevent them from buying a home

By Ashley Effinger

As a mortgage originator, your role isn’t just about securing loans for clients. It’s about guiding them through the intricate maze of homeownership and ensuring they avoid the financial potholes that can derail their dreams. Understanding the credit landscape is one of the most critical aspects of this journey.

“As a mortgage originator, you can instill confidence in your clients by offering a proactive solution that directly contributes to their financial well-being.”

Credit can be a minefield, but armed with the proper knowledge, you can help first-time homebuyers sidestep the money traps in wait. You’ll need to delve into the granular details of these traps, provide real-world examples, and offer practical solutions that empower you and your clients to make informed decisions.

Accurate assessment

Imagine a builder laying the foundation of a house without assessing the ground beneath it. Similarly, prospective homebuyers who don’t scrutinize their credit reports set themselves up for disappointment.

Encourage your clients to obtain credit reports from all three major bureaus — Equifax, TransUnion and Experian — and review them for inaccuracies. Even a minor error can lead to a higher interest rate or an outright loan rejection. Advise your clients to request their free annual credit reports and dispute any inaccuracies they find. A clean and accurate credit report is the bedrock of a solid financial foundation.

At the same time, many prospective homebuyers may neglect credit utilization. Think of credit utilization as the delicate balance between water and a boat. Too much water (high credit utilization) can sink the ship (credit score), while too little water can leave it stranded.

“Credit can be a minefield, but armed with the proper knowledge, you can help first-time homebuyers sidestep the money traps in wait.”

First-time buyers often fail to realize the impact of credit utilization on their scores. Encourage them to keep their credit card balances below 30% of the limit. Recommend they pay down high balances before applying for a mortgage. Doing so can improve their credit score and increase their chances of securing a favorable loan.

In the excitement of purchasing a new home, clients may be interested in offers for new credit cards or financing. Each new credit application triggers a hard inquiry, which can temporarily lower their credit score. Moreover, the average age of their credit accounts will decrease, potentially affecting their creditworthiness. Advise clients to hold off on opening new credit accounts until their mortgage is secured. Patience can pay off with a more robust credit profile.

Just as a homeowner wouldn’t demolish a structurally sound room, clients should be cautious about closing old credit accounts. The length of their credit history contributes to their credit score, and closing old accounts can shorten this history, potentially leading to a lower score. So, encourage clients to keep their old accounts open, even if they don’t use them regularly. A diverse and established credit history is a valuable asset.

Late or missed payments are like cracks in a home’s foundation, weakening the overall structure. One late payment can significantly dent a credit score and raise a red flag for lenders. To solve this, stress the importance of making payments on time, every time. Urge clients to set up reminders or automatic payments to stay on track.

Careful planning

Picture a homebuyer standing at the edge of a cliff, unable to proceed because they didn’t plan their route. Similarly, clients who don’t plan their credit moves ahead of the home purchase process might find themselves in a tight spot. So, suggest that clients get their credit in order at least six to 12 months before house hunting. This process may include paying down debts, resolving outstanding issues and building a solid credit history.

Some prospective borrowers, especially parents, may be inclined to co-sign loans for family and friends. Co-signing a loan might seem like a gesture of support, but it can have far-reaching consequences. The co-signed debt appears on your client’s credit report, potentially affecting their debt-to-income ratio and creditworthiness. Advise clients to carefully consider the implications before co-signing a loan. They must know their credit can be negatively impacted if the primary borrower defaults.

Closing costs can be a rude awakening for first-time buyers. It is essential to account for these expenses as they work to afford the upfront costs of homeownership. Educate clients about the closing costs of a home purchase. Advising them to have an emergency fund can help them navigate this financial hurdle.

Securing a preapproval is a green light for many clients to start shopping for their dream home. But they need to remember that their preapproval is based on their current financial situation. Warn clients against making significant purchases or taking on new debt after preapproval. These actions can alter their financial picture, jeopardizing the final mortgage approval.

Imagine adding extra support beams to a house, strengthening its foundation. In the realm of credit, first-time homebuyers often overlook an invaluable opportunity to fortify their profiles by including nontraditional data such as rent payments, cell phone bills and utility bills. While landlords aren’t obligated to report on-time rental payments, credit bureaus offer programs that make it a breeze to add this data. One such game-changer is Experian Boost, which opens the door to significant credit score enhancements by factoring in these previously unaccounted-for payments.

As a mortgage originator, you can be the bearer of exciting news to your clients. Have them explore options like Experian Boost to tap into this hidden potential. This tool allows them to grant permission for the credit bureau to access their bank account and identify eligible payments. Your clients can add up to 24 months of past rent payments to their credit history, potentially turning this often-missed credit-building opportunity into a formidable advantage.

Potential boost

Imagine a client, Emma, who is excited about purchasing her first home. Her credit score, however, is hovering slightly below the threshold for favorable mortgage terms. But there are ways that you can help her. Mortgage originators have an opportunity to introduce clients to an invaluable credit-boosting tool.

Upon your recommendation, she explores Experian Boost and adds 24 months of consistent rent payments to her credit report. Her credit score climbs by 40 points in only two months, opening doors to better interest rates and loan options. Emma’s journey is a testament to the real-world impact of proactive credit-building strategies on a first-time homebuyer’s dreams.

Here’s how it works: Clients grant permission to access their bank account transaction data. The access needed is solely to identify eligible payments that can be included in their credit profile. The credit bureau analyzes the transactions and identifies recurring payments such as rent, cell phone and utility bills. These payments are generally not reported to the credit bureaus through traditional means. TransUnion has a similar version called TruVision, while Equifax works with third-party vendors to report this information.

The credit bureau then presents a list of identifiable charges to the client for confirmation. The consumer has complete control over which payments they want to include in their credit report. Once the client confirms the charges, the data is incorporated into their credit profile. This additional information can have a notable impact on their credit score.

Experian reports that, on average, clients who use Boost see an instant credit score improvement of 13 points, but it can eventually range up to 50 points or more. This enhancement can lead to more favorable loan terms and interest rates. The increase doesn’t take years to materialize. Many clients experience the benefits within 45 to 90 days, making it a relatively quick solution for those looking to buy a home soon.

For first-time buyers, these credit-building tools can help create a more positive credit history. The inclusion of timely rent payments showcases responsible financial behavior that lenders appreciate. As a mortgage originator, you can instill confidence in your clients by offering a proactive solution that directly contributes to their financial well-being.

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Mortgage originators are not only financial guides — they’re also navigators of the turbulent waters of credit and homeownership. With these insights, you can empower clients to make intelligent financial decisions.

Each avoided trap brings them closer to achieving their dreams of a new home without the credit quagmires that often sink the unprepared. So, go forth and be the beacon of credit wisdom your clients need to walk their homeownership path with confidence. ●


  • Ashley Effinger

    Ashley Effinger is a credit repair specialist and owner of the Credit Queen, which helps people repair their credit and understand essential financing concepts. Effinger is also a FreedomPath adviser. She’s a digital marketing maven who is on a mission to change financial lives for the better. By day, she’s mastered the art of improving credit scores and teaching budgeting wizardry. By night, she’s a devoted wife and mom to five amazing kids.

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