Daniel Rosen is the founder of software company Credit Repair Cloud and author of The Ultimate Guide to Starting a Credit Repair Business.
5 Ways Your Clients’ Credit Affects You
You know that client credit is critical for mortgage approval, but are you aware of the impact it can have on your real estate business?
June 7, 2018
Your clients’ credit is relevant in many more ways than just getting approved for a mortgage. You may be surprised to know that their scores have implications for your business and how much you get paid for your services. How is that? Here are five ways your clients’ credit affects you.
When clients get unfavorable loans because of bad credit, it can reflect on you. The first step for most home buyers is to get preapproved for a mortgage, though not everyone agrees on the merits of preapprovals. Clients who have limited loan options because of a low credit score likely will seek advice not only from mortgage officers but also from you. Here’s where your knowledge and reputation as a customer service provider is important.
You should, for example, be prepared to answer questions and warn of risks associated with “nonprime loans,” a postrecession PR nomenclature for subprime loans. These loans, which clients can get when they don’t qualify for a traditional mortgage, can be risky. So when you work with a client who has secured a nonprime loan, you are showing support for risky financial behavior that may come back to reflect badly on you.
Help clients who have good to great credit scores get preapproved for a loan in their financial comfort zone. Advising them to wait a few months in order to pay down debt or otherwise improve their credit report can benefit both your client and your business reputation. Educate yourself on the factors that impact credit scores, including:
- Length of credit history
- Debt-to-income ratio
- Debt to available credit ratio
- Payment history
- Public records such as bankruptcies or collection items (even library fines can reflect poorly on a credit report)
- Accounts in use
Credit scores don’t reveal your clients’ entire financial picture, but they give a good indication of their future ability to pay the mortgage and keep the home you worked hard to find for them.
Better client credit earns you higher commissions. A client may be preapproved for a smaller loan if their credit history is not long or their credit score is not high. While you can still work with clients in the good credit score range to find a mid-range house, helping people settle for an OK home is not what most real estate professionals are clamoring to do. And it won’t pay you well.
You work hard every weeknight and weekend writing and rewriting offers, anxiously awaiting escrow to close. You want to get paid handsomely for your hard work. A wonderful client with a low credit score is not going to be able to get preapproved for a competitive mortgage for a premium property. So the more clients you have with low scores, the smaller your commission checks will be.
Even if you’re getting a lot of clients and leads with less-than-amazing credit scores, there’s hope. You can help buyers who are on the verge of a great credit score improve it with better financial habits or clear up small credit issues by writing a letter to the creditors. You may be surprised by the impact a few negative items can have on your clients’ credit report. On top of getting clients approved for the home they really want, if you genuinely care about people, the good news will spread. You will more than likely get referrals from people who like and trust you.
Clients with low credit scores require your knowledge of alternative financing options. If your clients’ credit scores are not in the high 700s, you can help them utilize other resources. FHA and VA loans help hardworking families become homeowners. If you choose to work with buyers who have lower credit scores, you’ll need to educate yourself on alternative financing options like these.
- Get an FHA loan: Over 3,000 counties in the U.S. decided to follow the recent national limit increase, with some loan limits for single-family homes reaching in the high $600,000s.
- Consider a VA loan: Eligible borrowers include “service members and veterans, spouses, and other eligible beneficiaries.” It’s worth looking into if a VA loan could help a client save money on the down payment or get approved sooner.
- Provide a higher down payment: If your client has poor credit, they can sweeten their offer with more cash up front. However, the way the market is trending, even people with great credit are offering a higher down payment. So improving their credit score is still a good idea for most of your clients.
You’ll get more business from clients with great credit. Clients who are happily settled in their new home and steadily paying their mortgage are more likely to refer friends and neighbors to you. Usually, these happy home buyers are people who have less financial risk on the line and are more likely to be financially stable in the coming years. They likely have friends in similar positions, so your referrals will be high quality.
On the other hand, the young couple whom you nudged a bit toward the home just outside their budget and who now have a baby on the way are wondering if they should have said no to this house. They may not be a great referral source. In fact, unhappy clients may be a source of bad press, something that’s hard to shake.
It’s imperative that you pay attention to your clients’ nonverbal cues—one of which is their credit score. Even if a client can get approved for a higher loan, or their partner can, it doesn’t mean they should. If your clients have a poor credit score (below 650) then you may get the backlash of buyer’s remorse down the road.
Clients with great credit are more likely to buy investment properties. Similar to referrals, repeat clients can keep your business afloat. Whether they’re middle-aged parents cosigning on their child’s first home or investors trusting you to tell it to them straight, your clients’ credit score can really boost your repeat business and help you sell more properties.
Clients with great credit are more likely to buy a second investment property. Bankrate lists being a “strong borrower” as a competitive advantage for those looking to snag real estate investment properties. The indication of a strong borrower is a credit score above 740. In addition to a loan, banks want serial investors to have a reserve for each property set aside. Clients with great credit scores have a proven financial track record, save money in their everyday expenses, and are in a better position to purchase a home and investment property soon after.
No matter whether your clients have great credit or poor credit, it will affect many parts of your business, from closing the sale to getting referrals and creating a network of happy clients. Understand credit, and you can close more sales and help your clients get the home they deserve.
Updated: November 14, 2018