Home buying is an ultracompetitive game. Smart buyers hire savvy real estate agents like you to guide them through the process and share insider tips to help them gain an advantage over other buyers. As we head into peak homebuying season, it’s more important than ever for prospective buyers to get a handle on their credit standing.
According to Compare Camp, 6 out of 10 Americans have a credit score above 700, which is considered “good.” But, only 1.2% of Americans have achieved the highest possible score of 850, so most buyers will have room to improve!
While some of your clients may have a general idea about credit scores, you may need to educate some of your newer or first-time clients. It’s important to explain what a credit score is, how to improve it, and the benefits that come along with a higher score – especially in a tough market.
Credit score basics
Credit score, also referred to as a FICO score, is one of the most important metrics lenders use to determine whether buyers qualify for a mortgage. The acronym FICO stands for Fair Isaac Corporation – the company that computes these scores. These scores range between 300-850, giving lenders a quick snapshot of how good a buyer is at paying back their debts on time.
When a lender checks a potential borrower’s credit, they run their credit score and get three numbers back. These scores are compiled by three major agencies: Equifax, Experian and TransUnion. Each agency gives one credit score, all of which are usually slightly different from each other.
For example, one bureau could give a score of 700, another says 729, and the third comes back with a 725. If the numbers are all similar like this, the borrower is considered to have good credit. The lender would use the median score when determining loan eligibility.
To give your clients a better idea of how their credit score – and therefore, chances of securing a loan – ranks, you can share this chart:
- Credit Score Below 580 – Poor
- Credit Score Ranges from 580 to 669 – Fair
- Credit Score Ranges from 670 to 739 – Good
- Credit Score Ranges from 740 to 799 – Very Good
- Credit Score 800 or above– Exceptional
A homebuyer will typically have a credit score average of 728, which is higher than the national average of 706. About 12% of Americans have a “poor” credit score.
Why your clients need to score big
According to a study by FICO.com, the average credit score in the United States has been on a steady upward trend in recent years.
That means your clients should be dedicating more time and attention than ever to boosting their credit score to make sure they aren’t at a disadvantage when stacking up with other bidders who have already improved their credit scores.
If your clients are concerned about how their subpar credit might affect their ability to purchase a home, let them know that it’s not a hopeless situation. Share these tips on how they can improve their scores, so they have a better chance at getting approved quickly.
Pay Your Bills on Time
Sometimes things just happen that prevent us from paying a bill on time. Maybe it just kept slipping your mind, or you forgot to drop the check in the mailbox. But not paying your bills on time, or not paying them in full, shows a lack of financial discipline that’s a big red flag to lenders. On-time payments can account for nearly 40% of your FICO score. So, do yourself a favor and pay your bills on time and in full.
If You Can’t Pay on Time, Negotiate
If you can’t pay your bills on time, don’t wait to let them go delinquent. Sometimes you can negotiate with your bank or creditor to extend your loan period and reduce your Equated Monthly Installment (EMI). It will make a good impression with your bank and may save you from incurring additional penalties.
Keep Your Credit Debt Within the Limits
Your debt-to-credit ratio, or credit utilization ratio, plays a big role in your credit score. Your debt-to-credit ratio and how much debt you carry account for 30% of your FICO score. A good rule of thumb is to keep your outstanding, unsecured credit below 50% of your annual salary.
If You Use Credit Cards, Use Two
The only thing worse than having one maxed-out credit card is having two. But, there are some benefits to spending with two credit cards. Specifically, it can help you keep your usage percentage under control.
Maintain a Healthy Mix of Credit
There is good debt and bad debt. While all debt can keep you up at night, there is a distinct difference. Essentially, if your debt increases your net worth or has future value, then it’s good debt. If your debt doesn’t do that and you don’t have the cash to pay for it, then it’s bad. Home loans, business loans, and even student loans are considered good debt. Personal loans and credit cards are the “bad stuff.”
Pay off Your High-interest Loans and Small Debts First
If we could all magically wipe out all our debt, we would. A more realistic solution is to pay off debts the old-fashioned way. A good strategy is to start with the high-interest loans and small debts. Bad debt, like credit cards, usually have high-interest rates and aren’t creating assets. They’re just draining your dough, so get rid of them.
Regularly Monitor Any Joint Accounts or Co-signed Loans
Be cautious when co-signing a loan or opening a joint credit account with anyone, especially someone outside of your close family. Closely monitor the statements on a regular basis for any issues and have them sorted out immediately. You don’t want to be held accountable for someone else’s bad financial decisions.
The peak homebuying season is coming fast. Make sure your clients are taking steps to review their credit status and boost their scores so they can increase their chances of beating out the competition when it’s time to start the bidding.
*Not all borrowers will qualify. Contact us for more information on fees and terms. Not intended as legal, financial, or investment advice. Contact your financial representative for more information.
Catraining, A. (2018, March 16). Why is your credit score important in buying property? Retrieved March 25, 2021, from https://www.carealtytraining.com/real-estate-clients-buyers-credit-score/
Folger, J. (2021, January 14). 800-Plus credit score: How to make the most of it. Retrieved March 25, 2021, from https://www.investopedia.com/800-plus-credit-score-how-to-make-the-most-of-it-4685008
Zuckerman, W. (2021, February 12). 44 credit Score STATISTICS: 2020/2021 data by age, gender & generation. Retrieved March 25, 2021, from https://comparecamp.com/credit-score-statistics/