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You are in the perfect position to educate first-time homebuyers on how financial stability will help them achieve sustainable, successful homeownership. Start by taking off your loan officer hat and offering them sound advice about what they need to do to prepare before buying a home.
1. Learn about credit
Encourage first-time homebuyers to get a free copy of their credit report from each of the three major credit agencies once a year. If they discover an error on any of the reports, they should submit a request to the appropriate credit bureau to have the error removed. Their credit report will give them a better understanding of where they fall on the credit spectrum, and you can explain what that means for their financing costs.
If their credit scores come in lower than anticipated, you can suggest ways to improve them, which could potentially reduce borrowing costs.
Also, consider educating borrowers on their credit utilization ratio. A high utilization ratio may adversely affect their credit score. Keeping their per-card and overall credit utilization ratio below 30% is important to achieving and maintaining a good credit score and will better prepare them for applying for a mortgage.
This infographic can help you explain credit basics to your borrowers.
2. Identify financial problem areas
While student loan debt certainly gets a lot of press, often it’s actually credit card debt that can have a more harmful effect on borrowers’ financial stability by inflating their debt-to-income ratio (DTI). The best solution is to pay down outstanding credit card balances. The National Foundation for Credit Counseling recommends credit card debt payments be kept to within 20% of monthly income.
If your borrowers can’t meaningfully reduce the amount they owe, they may still be able to reduce their monthly payments by asking their credit card companies for a lower interest rate. Oftentimes, if a cardholder has consistently paid on time for an extended period of time, a credit card company will reduce the interest rate on the card at the cardholder’s request.
3. Prioritize debt payoff
If paying down debt is an option, help your borrowers understand which debts to pay first. As you know, not all debt is created equal. Mortgage loan debt and student loan debt are generally considered “good debt” since they position individuals to increase their future net worth. However, since payments toward good debt will also factor in your borrowers’ DTI, there is the concept of too much of a good thing.
Take time to suggest they evaluate all of the debt they hold and the various interest rates on that debt. Typically, they should pay down debt with the highest interest rates (typically unsecured credit cards) first. If they have student loan debt and auto loan debt, suggest they give priority to paying down the auto loan, regardless of the interest rate, because auto loans are generally not viewed as good debt.
“Helping borrowers achieve financial stability is also about helping them set manageable goals, stay positive and understand the big picture.”
4. Find ways to cut back
One of the simplest ways for borrowers to build financial stability is to identify how they can cut back on expenses, such as eliminating a couple of stops at the coffee shop each week, bringing lunch to work, or limiting personal travel. Suggest that they add money they find through expense cutbacks directly to their savings account or use it to pay down debt. Another tip would be to suggest they put at least some of their monthly income into a savings or retirement account each month. Your goal as a trusted loan officer should be to suggest best practices that will help potential borrowers reduce debt while growing their savings.
5. Set goals – Change their mindset
Helping borrowers achieve financial stability is also about helping them set manageable goals, stay positive and understand the big picture. If their goal is to secure a mortgage, work with them to set a timeline and provide tips and insight for reaching that goal. Often, financial stability comes through paying off debt. If this is the case for your borrowers, suggest they reward themselves in some small way each time they pay off one of their debts.
In a perfect world, every borrower who comes through your doors would be financially prepared to buy a home. In the real world, that isn’t always the case. Taking the time upfront to discuss financial stability with potential borrowers will save you time and your customers the frustration of having a loan application turned down.