Bad credit is the biggest stumbling block for potential homebuyers. Many of us have less-than-stellar scores, but ignoring it only makes things worse. Unfortunately, a number below 700 is going to make it much harder for them to secure a loan. Here’s what you can do to help your clients with bad credit.
Help Them Understand the Numbers
Many people have no idea what a good credit score is! Lenders consider anything above a 760 to be ideal. Those buyers should have no trouble getting the money they need at an optimum interest rate.
From 700-759 is still considered a good score. However, when the score dips below 700, it is only considered “fair.” Wannabe buyers with a credit score below 650 is considered “poor.” Those people will have a harder time securing a loan and will likely pay a much higher interest rate.
Credit scores are calculated using a variety of factors. The most important factor is on-time payment history. Delinquent accounts can very quickly lower a credit score. Debt-to-credit utilization is also very important—and, thankfully, easier to correct. Ideally, the buyer should aim to use no more than 30% of their available credit history.
Other, less important factors include the length of their credit history, the balance of different types of credit and loans, and whether any new accounts have been opened recently.
What Can a Client with Bad Credit Do Right Now?
The first step for clients who are struggling with bad credit is for them to request a free copy of their credit report. They need to go through the report and understand why their score is lower than they would like.
Next, they should dispute any errors on the report. Many reports contain errors, and although this can be a lengthy problem to resolve, it’s absolutely worthwhile.
If your client has a poor credit-to-debt ratio, asking for a credit increase can actually help! They might be able to get a bump on a credit card limit, which will skew the ratio back in their favor.
What Can They Do Going Forward
This should be obvious, but paying debts on time is the most important action to rebuild bad credit. Paying off delinquent accounts should be the next highest priority. Paying off creditors or collection agencies will help heal their credit over time.
The good news is that clients with the worst credit—scores below 650—often see the fastest jumps. That’s because bringing a delinquent account up to date makes such a big difference. Still, potential homebuyers should know that this process will take time.
Finally, make sure your clients know not to open any new lines of credit before they try to get a loan! Buyers often make the mistake of applying for a new credit card or even buying a new car before moving forward on a real estate purchase.
