October 9, 2019
Our NJ real estate licensing courses involve an entire day learning about mortgages. Garden State Real Estate Academy gets lots of positive comments for teaching real world real estate in addition to what students need to pass the state exam, and the chapters on mortgages always draw lots of questions.
“What is a credit score?”
“What if a buyer has bad credit?”
“What if a buyer has no credit?”
What is a credit score?
Real estate courses should teach pre-licensing students that every time purchasers buy on credit, the vendor reports how you paid that debt. The three major credit reporting agencies: Equifax, Experian and TransUnion weigh those reports differently. One may give a higher number for car loan payments. Others may rank credit card or utility company payments higher.
But that one late payment, that one unpaid parking ticket that led to a judgement will affect your credit score for at least the next seven years.
The most famous and commonly-used credit score is the FICO score—a contraction of the issuer, Fair Isaac Company. To compete with FICO’s near-monopoly, the three major credit bureaux have now set up their own scoring model called VantageScore, and it is gaining popularity.
Credit scores range from 300 to 850. The credit score needed for a mortgage varies. When a company considers whether to grant credit, they choose the “middle score.” This is not necessarily the average of the three. A person with scores of 640, 643 and 670 would be said to have a 643 credit score.
Traditionally, we would tell buyers that 640 is the benchmark. Anything above that is likely to result in a lower interest rate. However, it is possible to get certain mortgages with a FICO score as low as 580. “But there is a good 580 and a bad 580,” says Jeremiah Phillips, loan officer at Greentree Mortgage in Cherry Hill. “A good 580 is where we can see you were paying your bills on time but then incurred bad reports because of unanticipated medical bills. A bad 580 is one where there are late pays and collections on regular everyday credit accounts.”
How do I get a good credit score?
We recognize that students signed up for a real estate licensing course, and we want our students to understand that while the Big Three credit bureaux use slightly different algorithms for the reports they receive (which is why you will typically have three different scores). There are five considerations that go into arriving at those scores:
1: Payment history
2: Credit utilization
3: Length of credit history
4: New credit
5: Credit mix
Fully 35% of your credit score comes from how timely you have made your credit payments. There is an adage, “It is better to pay the minimum payment on your credit card one day early than to pay off the entire balance one day late.” It incurs a huge hit on your credit score if you exceed the credit limit given by the creditor—even if you only exceed it by a dollar.
Credit utilization refers to the amount of available credit you are using and accounts for 30% of your credit score. Your target should be 30%. If you have one VISA card with a $10,000 credit limit and a $5,000 balance, even if you are making your payments on time, your score will suffer because you have a 50% utilization ratio. But if you were to obtain a MasterCard, also with a $10,000 credit limit, and were to never use it, your utilization ration just dropped to a near-perfect 25%.
15% of your score is based on the new credit you have been given. Credit reporting agencies worry about new lines of credit because you cannot demonstrate a history of making those payments on time. Credit lines that you have had for a long time really help, because you have a long track record of paying your debts on time. So don’t close old credit card accounts.
Finally, 10% of your credit score comes from the mix of credit you are using. For example, a credit bureau would much rather see a person have a car payment, a mortgage loan, a store credit card and a bank credit card than a person with four bank credit cards.
What if a person has no credit?
You’ll soon finish your real estate licensing course and will be licensed New Jersey REALTORS. Your buyers will not get a mortgage loan if they have no credit, because a lender cannot evaluate how likely they are to timely repay their loan. The best way to overcome this is to get two or three credit cards—maybe one from a gas company, one from a department store and a revolving credit card, such as a Visa. For those clients who dislike credit, advise them to just spend a few dollars each month on each card and then pay off the balance on time.
If the bank will not give you a credit card because you have no credit, try asking for a secured card. This is where you deposit a certain amount with the bank, and they issue you a Visa or MasterCard with a spending limit of that amount. If you pay the bill on time each month, you will have a recorded credit score in six months.
Is it a waste of time dealing with a buyer who has bad credit?
Not necessarily. Most local mortgage companies work with credit repair agencies who can show a client how to improve their scores within a few months. The loan officer can also run your client through the “Rapid Rescore” software, which will tell the buyer, “If you do THIS, then your credit will increase to THIS.”
The important point is to stay in touch with your buyer clients while they work to improve their credit score. There are few things more frustrating than discovering that “your” buyer has bought a home through another agent five months later because he hadn’t heard from you and he met the new agent at an open house.
Now that we’ve shown you how you can still be a real estate Rockstar—even if you have a buyer with poor or no credit. If YOU are considering a real estate career, I can attest to what a wonderful occupation it can be. The joy you will feel of seeing first-time home buyers get the keys at settlement, or the multiple “We could never have done this without you” comments from grateful sellers will stay in your memory long after you forgot how much commission you made. Come join us at Garden State Real Estate Academy and let New Jersey’s top-ranked real estate school help you get your license soon!
David C. Forward is a licensed real estate broker and instructor and was first licensed as a Realtor® 31 years ago. During his career, David and his business partner sold more than 450 homes in South Jersey. He is now School Director of Garden Real Estate Academy, has won numerous awards for real estate sales, is a much-requested public speaker who has addressed audiences on six continents and is the author of 14 books. David can be reached at David@GSREacademy.com