For you to master this great speciality of real estate finance qualifying buyers is only part of the challenge. Almost as important is to keep up to date with changes in the industry. The lenders I have asked agree that you are smart to qualify a buyer by calculating the buyer’s front-end (housing) and back-end (debt) ratios.

The ratios demonstrate whether buyers can afford their proposed monthly housing expenses given their current monthly income and debt. Lenders increasingly care more about buyers’ credit, however, than about the front- and back-end ratios. You may be familiar with credit reports, but how does a credit score impact your buyers’ or owners’ prospects for loan approval?

Personally, I found this to be true after a platform presentation I gave on finance at Wisconsin’s annual Realtors' convention in October, 2000. A lender in the crowd came up to me and suggested I temper my comments somewhat given his experience in the last few months with underwriters.

Often he found that his underwriters were willing to overlook high levels of monthly debt as long as the FICO scores were solid. He spoke of loan applications being approved with back-end ratios in excess of 50% and one that was close to 60%.

I checked with my loan officer, Tim Roach, who agreed. With Fannie Mae’s Desktop Underwriter and Freddie Mac’s Loan Prospector, lenders are making loan approval decisions based on borrowers’ FICO scores more frequently. With satisfactory scores and assets left over after settlement, lenders are approving loan applications with ratios as high as 70%. Tim said that with a 20% down payment and a solid credit score, the borrower would not be considered much of a risk.

FICO Scores.

What is a FICO score? FICO is an acronym for Fair, Isaac, and Company. FICO credit scores indicate the likelihood that a prospective borrower will default on his or her mortgage. According to the Wall Street Journal (3/19/02), William Fair, an engineer, and Earl Isaac, a mathematician, have been passionate about predicting consumers’ future behavior since they founded Fair Isaac in 1956.

FICO scores are used by almost all major lenders and in upwards of 75% of all mortgage decisions (New York Times, 3/25/01). Four primary considerations determine whether the risk model used will spit out a good score: timely payment of bills (35%), total debt (30%), length of time credit has been in use (15%); application history (10%); how much credit a consumer has and the type of debts incurred (10%). The scores range from 300 to 850.

According to Consumer Reports (1/01), the typical borrower who rated an “A” has a score of more than 650, no late mortgage payments, and no more than one thirty-day late credit card payment.

Money-Making Tip

So what’s this mean to you? How can you use this new knowledge of changed practices in the finance industry to better serve your buyers (applying for a mortgage) and owners (interested in refinancing)?

Get the word out that you are an expert up to date with current practices. Give the people in your sphere of influence a reason to contact you or visit your web site regularly rather than just when they are interested in buying or selling property.

Advise your buyers and owners to check their credit scores. Not only will they learn what their scores are, but they can find out what their numbers mean and how to improve them. FICO scores and other valuable credit data are available through three web sites:

• Fair and Isaac’s http://www.MyFICO.com ($12.95) credit score, explanation, and tips on how to improve the score.

• http://www.ScorePower.com ($12.95) credit score, Equifax credit report, and tips on how to improve the score.

• Equifax’s http://www.Equifax.com ($9.00) credit report, credit history, advice on how to correct inaccuracies.

Empower your prospective buyers and sellers with the necessary knowledge for them to make the best decisions for them and their families. Master this great field of real estate finance and ensure the success of your career!

Published: May 24, 2002

Use of this article without permission is a violation of federal copyright laws.

Mike Merin, CRB, CRS, ITI is the author of ATTACK THE MARKET! Specialize in Negotiating, Finance, Pricing or Technology which details how an agent can guarantee his or her success by learning and marketing skills that consumers value today. With graduate degrees from Columbia University, Mike was a negotiator for the U.S. Government in Washington, Moscow, and the capitals of our most significant trading partners. Beginning in 1985, he purchased with partners his first of several investment properties. He left the international arena to support his wife’s career and joined Prudential Fox & Roach REALTORS® as a successful agent in the Philadelphia area. An award-winning author, you can read or purchase Mike’s publications at www.mikemerin.com.