A lot of real estate agents (and mortgage brokers for that matter) do not realize that loans are often botched by the borrowers themselves during the home buying process. Let’s take a look at a few examples.Debt ratios
Most credit experts believe that the total debt on revolving accounts (credit cards) should be kept below 30%. The balance on any one credit card should not exceed 50%. Case in point, as a hard working real estate agent, you dutifully show homes to a couple who is house hunting. Both clients say “Wow” when they walk through the front door. An offer is made and accepted by the seller. Later that day your client gets a fabulous balance transfer offer in the mail. 4.99% for the life of the balance sounds great, so your client transfers the balances from a few other cards in order to take advantage of the spectacular offer. Now the balance is dumped onto one card instead of spread out over several cards. The debt ratio on that one card jumps to 90%, and now the borrower looks “maxed out” to the credit scoring system.
The reverse is also true. Consumers can transfer balances to lower their debt ratios, thereby improving credit score. If a consumer has two credit cards—one with a zero balance and one with a balance of $6,000 on a $10,000 line of credit—moving part of the balance to the other card will boost credit score.
New credit and department store lines of credit
In expectation of moving in to a new home, your clients decide to upgrade their living room furniture. The furniture store offers them a “no payments for x number of days” deal because of their solid credit score. This is a triple whammy to credit score. First, applying for the furniture creates an inquiry, negatively affecting credit score. Second, opening new lines of credit is in itself potentially harmful to credit score. Lastly, the FICO scoring model frowns on department store lines of credit. They prefer to see VISA, MasterCard, American Express and Discover—not Fran’s Furniture Barn. Homeowners-to-be who want to buy goodies for their new home should either pay cash or wait to make their purchases until after closing. This triple whammy could seriously jeopardize a consumer’s credit score.
Closing credit card accounts—a big no, no
Many consumers think that closing lines of credit will boost their credit score. After striking a deal with a seller to buy a home, some borrowers botch their good credit by closing existing lines of credit in preparation for applying for a home loan. Cancelling existing credit cards is harmful to credit score because it destroys established credit history. If the consumer has balances on other cards, it also increases their total debt ratio because total credit limits have been decreased.
Don’t clean up credit during the home loan process
Let’s say that your client defaulted on a small student loan years ago. Being a first time home buyer and wanting the deal to go smoothly, the client decides to make things right. The client contacts the lender and works out a payment arrangement, honorably making the first payment right on the spot. This could squash the client’s credit score. You see, the scoring system gives the most weight to the previous two years of credit history. If your client starts making payments on an old account, the old account suddenly becomes current. It will actually wind up hurting the client’s score because it will count as “recent activity on a negative account.” If the client wants to clean up the negative item, it should be done after closing or through proceeds distributed at closing.
Buying or leasing automobiles
Borrowers should never buy or lease automobiles during the home loan process. First, the credit inquiries by car dealers will lower credit score. Second, a new auto loan could compromise the borrower’s debt ratios.
As a real estate agent, educating your clients about credit score could result in more closed deals and more referrals because you become their knowledgeable source on a subject that just happens to affect all their major purchases.
Posted By: Wade Young Red Door Home Loans
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{ 4 comments… read them below or add one }
Oh no, the dreaded ‘Rooms To Go’ PTC credit card purchase. lol
Great article Wade and welcome to Lenderama!
Welcom, Wade. My first broker told me of a deal he had once. At the closing table he learned for the first time, along with the sellers, the sellers agent and the closing officer, that the buyer (my broker’s buyer) had gone out the night before and purchased a brand new $35,000 pick up truck.
Now, the lending company was saying “no deal” on the loan. It apparently was not a happy room. Especially since my broker had given his “don’t buy anything” speech to the guy after contract acceptance.
Seems the buyer was sure that the loan company wouldn’t find out since he had bought it, literally, just 18 hours before.
The pickup truck and Rooms to Go are perfect examples. Thank you for taking the time to comment, and thank you to Todd for giving me the opportunity to contribute to this blog.
Now there’s always the third possibility that if the buyer buys the pick up truck & Rooms to Go furniture…
…The buyer can then live in the truck.
It’s a variant of the ‘furniture is already packed in the U-Haul’ story.
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