One day or another, every agent has been faced with (or will face) this problem: What do you do with a buyer that doesn’t qualify for a loan on the home they want to purchase? It’s a common problem and one that’s only becoming more common as loan payments increase.
A great benefit to working with buyers, especially first time homebuyers, is the excitement that they bring to the table. They are often transitioning from renting and very happy (giddy, even) to be embarking on this new chapter of their lives. You get to share this chapter with them too -- enjoy it!!
However, sometimes they do not have perfect credit, employment, or income -- and they cannot qualify for the loan that will get them the house they really want. Many times, people have a FICO score that is not up to par for the lender to work with. As we covered in our previous Credit Score blog, the buyers’ FICO scores will reflect their payment history and debt percentage.
Sometimes, there’s a small debt or past-due account that’s hurting the credit, and a great lender will know how to look over a credit report and decide what to pay off and what to adjust for a “rapid rescore.” This is one of the reasons why you want to help homebuyers get in touch with a mortgage broker and not necessarily with the banks directly. A bank is not as likely to recommend a rapid rescore or give advice as a mortgage broker would.
In a rapid rescore, once the debts are removed from the credit, usually by paying them off in full, the credit is re-run in a process that takes from 3-7 business days. After that’s done, the score is often many points higher - often bringing the buyer above the threshold to qualify for a loan!
There are three credit bureaus - Equifax, Experian, and TransUnion. The lender takes the middle score of the three, and therefore sometimes a buyer (borrower) can raise one score and qualify for the loan. Again, it’s really best to advise buyers with iffy credit to go to a mortgage broker and explore their options there, rather than just going directly to a large bank or corporation.
However, the FICO score is not always the reason that someone does not qualify for a loan. The lender will also look at employment history and debt-to-income ratio (DTI) to see if the borrower’s income seems stable, if they are tapped out with other debts or if they can easily afford the proposed monthly loan payment. A car payment is a common payment to eliminate, if the borrower has the cash reserves to pay off the loan or lease. It’s usually a few hundred dollars a month and can dramatically affect the DTI ratio, so it’s often one of the big ones to be considered.
Sometimes the borrower has not been at their job long enough, or their income is not a stable W2 income (for example - if they are a real estate agent!!). In this case, the lender is likely going to want copies of bank statements to verify the dollars coming in compared to the dollars going out.
Very often, a smaller lender (for example - a credit union instead of a bank) will have more relaxed guidelines on the above criteria and they will allow a borrower to obtain a loan when a bigger lender would not lend money. Ideally, it will be an institution such as a credit union or small bank, but every once in a while, borrowers will go to a “hard money” lender. A hard money lender charges high interest and usually wants the money paid back in a short period of time, so this is really not an ideal situation unless the borrower plans to refinance fairly soon after purchase.
All in all, it’s really best to steer clients toward a mortgage broker you know and trust - hopefully an intelligent and creative one that can come up with alternative ideas to the big banks. Like everything in real estate, it’s also important to have a good relationship with these mortgage brokers so that they can refer business your way as well. Some people actually contact their mortgage broker before their real estate agent, and that could be a source of business for you!
Don’t hesitate. Don’t let your buyers walk away. Keep your good connections with lenders and mortgage brokers, and steer your buyers in the right direction. Real estate is all about relationships and ensuring that the customer comes first -- keep that in mind, even when they don’t qualify for the first loan!
