How To Steer Around Homeownership Hurdles

According to the same FormFree study, one in 10 Americans have no idea what their credit score is, and two in 10 don’t know how to check their scores. A 2019 study by LendingTree found that nearly four in 10 Americans say they “have no idea” how credit scores work. Many homebuyers need assistance in understanding credit scores, the different scoring models, and even how their credit score factors into the homebuying process.

Down payments are another critical piece of the homebuying puzzle, and one that frequently makes potential buyers feel that homeownership is out of reach. Roughly 26% of first-time buyers stated saving for down payments was the most difficult step in the process, according to the “2022 Profile of Homebuyers and Sellers” by the National Association of Realtors (NAR).

The problem of saving enough for a down payment has led many borrowers to turn to friends and family for help. In fact, 22% of first-time buyers used a gift or a loan from friends or family for the down payment, states the same report from NAR. Of course, borrowers cannot use gift funds from just anyone. There are rules about who can be an eligible donor and how to document gift funds and these rules can be different for each loan program.

There are many small details that make a big difference when it comes to credit scoring and down payments. No one should expect borrowers to know all the ins and outs, so it’s up to the loan officer to help them.

Understanding Credit

Loan officers should be working with prospective homebuyers on their credit, specifically their FICO score, to make sure they are eligible to buy a home. There is clearly a large percentage of borrowers that do not know how credit works or how to build and maintain a quality credit score. Although some programs allow borrowers without a score to qualify, loan officers should be prepared to serve as a mentor on how credit scores work, how a score can impact their rate and program and what behaviors help make up the FICO score.

If you need a reminder yourself: payment history is 35% of a score, credit utilization is 30%, credit age is 15%, credit mix is 10% and new credit is 10%.

Educating borrowers on tools that monitor credit and how different behaviors impact their score is a critical piece of preparing them to buy a home. FICO Classic is currently the most important score for mortgages. Borrowers can use myfico.com to monitor their score, and they can use www.annualcreditreport.com to get their free credit report from each bureau once a year.

There are impending changes to credit scoring models in 2023 and beyond, however credit itself is not changing. Although some factors may be changing in credit scoring models, borrowers still need to pay their bills on time to keep or build a good score.

Down Payment Assistance Programs

Many first-time homebuyers still believe 20% down is required to buy a home and are not aware of programs available that either require less down or assist with down payments. As a loan officer, you should be prepared to explain the options available to your homebuyers.

Industry giants like Freddie Mac and Fannie Mae have down payment assistance tools and resources which may be a good starting point for borrowers. Also, many local housing finance agencies (HFAs) and community organizations have assistance programs. Keep in mind that programs will vary by location, and it is important that loan officers are educating their borrowers about the options that they are eligible for.

Loan officers serve an important role in making sure their borrower is ready for this major financial decision. It’s part of the job to make sure borrowers are educated on essential pieces like credit and down payment assistance programs. Providing guidance and resources helps borrowers understand their financial situation and can make their dream home a reality.