Credit Qualifying Q&A – Ask a Mortgage Broker

This article was originally published on BuyWiseMortgage.com and is being republished with the author’s permission.

Ask a Mortgage Broker – Part 3 –  Adrienne Markes, a Realtor friend of ours in Southern California, reached out to her social media followers asking for questions from first time buyers that she can ask a lender.  I was honored to be that lender, and here’s what we covered in this segment:

• Identifying a Professional
• Working with a Mortgage Broker
• First Time Home Buyer Questions
• What is the Minimum Credit Score to Qualify for a Home Loan?
• How Do You Know When You’re Paying too Much?
• Can We Qualify for a Mortgage After a Foreclosure in 2012?
• What Can I Do to Improve My Credit Score?

Identifying a Professional

Adrienne Markes is a Realtor in South Orange County, San Clemente area of California.  Adrienne put the question out to her social media following to collect questions to “ask a lender”.

Adrienne is a professional that understands the value of educating and empowering consumers.  It’s crazy that you should be afraid to talk to a loan officer because they typically come off as pushy and salesy…..You’re not wrong.  It’s gross.

Any lender that you hear about on TV, or through an advertisement of any kind, is dumping you into a call center, and you’re connected with someone trying to meet their sales quota for the month.

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As a professional independent mortgage expert, sharing what I’ve learned in over 20 years in the business is the best way that I can give back, and try to help consumers avoid the challenges that so many run into when they get tricked into working a call center lender.

The fact that Adrienne is committing her time and energy to educate and empower consumers should go a long way toward earning your trust.  She is a true professional in my opinion.

Working with a Mortgage Broker

If you’re a first time home buyer, you may be surprised to know that there is a pretty significant difference in interest rate and fees between a depository bank, credit union, direct lender, and mortgage broker.

The short and quick of it is that depository banks, like where you deposit your paycheck, do not specialize in specializing.  Depository banks and credit unions typically have pretty tight guidelines for lending.

While many people feel comfortable getting a mortgage from the place where they deposit their pay checks, my professional experience is that their ability to be creative when it’s required is limited.

I’m typically ok if the depository bank admits that you don’t meet “their guidelines” and that if you go to a mortgage broker you would qualify.  Most loan officers do not have that level of common decency.

Direct lenders suffer from massive overhead and middle management.  The way that direct lenders have had to grow their business over the past 10 years has left these organizations with massive overhead, which is passed through directly to consumers in the way of high interest rates and lender fees.

I always feel better if you’re working with a professional, or an expert at the specific situation that you may present, and there are definitely some great loan officers that work at a direct lender.  But if you can find that same professionalism or expertise from a mortgage broker, you should always get a second opinion.

Independent Mortgage Brokers tend to be entrepreneurial.  We are typically small business owners, and we build our business around a commitment to that kind of high level personal service that only a relationship with a seasoned professional will give you.

Independent mortgage brokers like BuyWise Mortgage have low overhead, no lender fees, access to wholesale interest rates that will often be much lower than if you went to a depository bank, credit union or direct lender.

I also talk about the difference between direct lenders and brokers during this interview, under the heading “How do you know when you’re paying too much?”.

First Time Homebuyer Questions

In total, this was a one hour interview.  We’ve broken it up into four separate videos so that it’s easier to consume, and more relevant to what you want to learn about.  This particular segment, we talk about credit scores, and what’s required to qualify for a mortgage.

More Questions and Answers from First Time Homebuyers:

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• Ask a Mortgage Broker 1 – Downpayment & Closing Costs
• Ask a Mortgage Broker 2 – Debt to Income Ratios
• Ask a Mortgage Broker 4 – How Do I Get Pre-Approved?

Adrienne:
Hi. Good morning everybody. My name’s Adrienne Markes and today I wanted to partner with Scott Schang who is one of my lender friends, and I had this idea a couple weeks ago, and some of you actually helped me with this.

I posted on Instagram a question to you guys, to ask whatever questions you had about getting qualified for a home loan or buying a house. After I compiled the questions, I got with Scott, he graciously agreed to let me interview him to get all of your questions answered. Scott, why don’t we get started?

Scott:
Absolutely. Thank you so much for having me here. This is so much fun. When you told me what you did, I was just so excited, ’cause any opportunity that we have to answer questions and help consumers when they’re not face-to-face with a salesperson, and feeling like they’re being pressured or feel like they’re being told or asked what the salesperson wants them to hear, so this is super, super cool and I think this is indicative of the type of professional that you are.

So, it’s an absolute honor and I appreciate you having on me here. Or, having me on here.

Yeah, you want to dive right into it?

What is the Minimum Credit Score to Qualify for a Home Loan?

Adrienne:
People are always asking, “What do I need to do to qualify?” The first question here is, “I have a 640 FICO score. Can I get a loan?”

Scott:
Yeah. Absolutely. Again, it depends. It depends on the loan program. It depends on the loan program and it depends on your compensating factors or your risk factors. Surprisingly enough, most people do not have bad credit because they did something wrong. In my experience, and I talked to hundreds of people a month, in my experience low credit scores are typically caused by people not knowing how to purposely build good credit scores.

Scott:
I hate to use the word manipulate, but there’s a game there. There’s definitely a credit scoring game and when you understand how the game works, you can manipulate your credit score higher. The minimum credit score, conventional, Fannie Mae and Freddie Mac are the only ones that really publish a minimum credit score and that’s 620.

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Scott:
You can get a conventional loan with a minimum 620 credit score. For me, I’m a mortgage broker, I’m not a direct lender. I have a different type of business model. I have access to a lot of different investors that offer a lot of different options. I can do FHA and VA down to about 550 or 560 credit score.

Adrienne:
Wow.

Scott:
Compensating factors, so they need disposable income after they pay all of their debts, they have income left over. That’s a popular VA calculation for low credit scores. FHA reserves are usually required so if you have two months worth of payments in your bank account that you will usually offset it.

So, now the thing about credit scores, though, and this is crazy, banks can also decide what minimum credit score they will accept.

Scott:
Like I said, I’m a broker now but when the market crashed, brokers had a really tough time and I was a direct lender for about seven or eight years. As a direct lender, I find this with most direct lenders, they will impose a minimum credit score for all of their programs.

It’s called an overlay. Anytime the lender decides to be more conservative and put rules on top of published underwriting guidelines, it’s called an overlay.

Scott:
Most direct lenders won’t touch anybody under 640. If somebody’s telling you no, you don’t qualify, ask around. That’s one of the challenges, that’s one of the reasons why I’m so grateful why you’re doing things like this, ’cause literally your options for buying a home or qualifying for a mortgage are limited to the experience of the person that picks up the phone.

If you saw a TV commercial, that person is sitting in a call center in Detroit and they have no idea what underwriting guidelines are, but if their minimum credit score is 620, they’re going to tell you you don’t qualify.

Scott:
You’re going to get frowny face, and you’re going to go away, you’re going to think you can’t afford a home. You just talked to the wrong person. There is flexibility and that’s what I hope consumers are aware of, that if somebody tells you no, you don’t qualify, that could just be their bank. There are options.

How Do You Know When You’re Paying too Much?

Adrienne:
Okay. Just a follow-up question to clarify for our viewers, is how do they know if they’re dealing with a direct lender or mortgage broker?

Scott:
You just ask ’em. You just ask them, “Are you a direct lender?” It’s a funny thing, it’s an interesting thing, and this is a little bit of a rabbit hole. But the way that … As a result of the market crash, most of the people who caused the problem pointed fingers at independent mortgage brokers. Small businesses, entrepreneurs, they blamed them for a lack of oversight, but the reality is, it was the big banks and it was Wall Street that really caused the crash.

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Scott:
But so now for years, lenders are bragging about, “I’m a direct lender, I’m a direct lender.” Well, the challenge in today’s market, like you and I are doing this, we’re early 2019. We’re first quarter 2019. Well, the game has changed.

Now, direct lenders have, they call it compression. It’s the way that the interest rates, the cost of interest rates, the cost of interest rates are getting higher. Interest rates are going higher than they were a year ago or two years ago.

Scott:
The overhead that direct lenders have to carry now with all their middle management and attorneys from the CFPB, all of the fallout from the crash, their interest rates are really, really high in order to cover all of these costs. Now there’s this huge divide between direct lenders and brokers, and pretty consistently my interest rates are a half to a full percent lower than a direct lender.

Scott:
Direct lenders are still, it’s a marketing strategy. They’re like, “I’m a direct lender, we lend our money.” It’s not exactly true. They get their money from the same place I get my money from. They get it from somebody, they lend it, then they sell the loan and they get the money back so that they can lend it to somebody else.

That is a total rabbit hole. If we want to talk about the market and how money flows through the mortgage industry, but just ask them. Most direct lenders are proud to say, “I’m a direct lender. We underwrite everything in house.”

Scott:
Those really aren’t advantages and they come at … It’s a different business model. Just simply ask the person you’re dealing with, and what I would recommend, so … All right, this is where I will leave this. The single most important thing is not interest rate and cost.

The single most important thing is competence. You need to work with a professional, you need to work with somebody who’s ethical and an expert. If they happen to be working for a high overhead business model, so you pay a little bit more, I’m not going to lose sleep over that as long as you’re working with a professional who’s ethical, who’s going to get you to the finish line without stressing you out.

Scott:
But all things being equal, talk to different people, make sure that if you talk to a lender, absolutely find yourself a broker, and they can ask you, they can go online. Find a broker and talk to a broker, and if you find that they’re both ethical and they both have the same level of expertise and professionalism, you will find that one is a significantly lower cost to you, which ultimately will allow you to have a lower payment and afford more loan.

There’s a lot of benefits, but sorry, that was a rabbit hole, but it really does, it really does go to these questions, the answer to these questions which are amazing questions, the answer depends on who you’re asking the question to and who they’re working for.

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Scott:
‘Cause most people aren’t going to say, “Oh, well my credit score is 640 so I would recommend you going anywhere else but here.” They’re never going to tell you that. They’re just going to tell you no, or they’re going to tell you, “Okay, here’s the next step.”

What Can I Do to Improve My Credit Score?

Adrienne:
I’m sure we can talk about it for the next two hours, but we’re going to move on to the next question.

Scott:
Okay, all right. That was a very polite way of saying, “Shut up and let’s keep going.”

Adrienne:
Okay, so along the lines of credit scores, and you touched on it a little bit, what can I do to improve my credit score? What’s this game you’re talking about, or how do people work towards getting that credit score up so they can get better interest rates?

Scott:
Yeah, it’s so much easier than most people think. 70% of your credit score, there’s quite a few factors that go into your credit score. The top two, 70% of your credit score is based off of two things. Your credit history and what’s called utilization of debt.

Credit history is whether you’ve made your payments on time, and most people make their payments on time. It doesn’t even mean that you didn’t have problems in the past. Really what lenders are looking at and what your credit score’s based on is the last 12 months.

Scott:
If you have no late payments in the last 12 months, you’re probably okay there. If you had serious delinquencies in the past, that could cause challenges. The second one is simply utilization of debt. You will find that on almost everything, like if you do your Credit Karma, it’ll tell you what percentage of your credit you’ve used. So, the magic number there is you want revolving credit card balances to be 25% or less of your high credit limit.

Scott:
If I had a credit card with a high credit limit of $1000 and my balance is $500, I’ve seen that impact credit scores by as much as 50-60 points.

Adrienne:
Wow.

Scott:
You get that down to $200, $250 or less, and you could get that 40, 50, 60 points back. The very first thing I look at is are there any credit cards with high balances? And 99% of the time that’s it.

Scott:
Lenders have the ability, we have software systems that have their modeling systems. We can say if you pay off these things, what impact could it potentially have on your credit? We have those types of options. I

f you’re seriously thinking about buying a home, though, have this conversation with a lender or a loan officer, because Credit Karma, that’s not the same credit as you use for a mortgage. While some of the trade lines might be accurate, the credit scores aren’t accurate, and there’s other things that’s not accurate.

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Scott:
Their motivation for offering their service for free is different, so you start clicking buttons and things like that, you’ll start getting phone calls from people.

Adrienne:
Yeah, and off topic, but it goes along with what you just mentioned, I have rental properties. Sometimes some of the applicants say, “I have this Credit Karma report, can I use that?” And I always run my own. But interesting when I run my own, it is night and day sometimes of what that shows versus what their real credit report shows.

Scott:
My experience has been if you have really good credit, if you’re above 720, 740, 760, there’s usually not that big of a spread. But the Credit Karma, that’s called a vantage scoring model, and it’s just a different model. What lenders use is the FICO model, so you’ve heard FICO score. FICO is just a scoring model that was created by the Fair, Isaac Company, in order to calculate the risk of lending.

Scott:
Vantage, that’s a different way of looking at it and it tends to always skew a little bit on the higher side. If you have a low 600 credit score on Credit Karma, that could easily be in the 5s on a FICO driven credit scoring model. That’s kind of geeky.

Adrienne:
I know. I know. But I’m glad that you clarified that, so that people that there is a difference and it’s important to definitely talk with a lender to get a true picture of where they stand. Okay, so what should my credit report look like to be approved for a home loan? Very broad, but what can you give us?

Scott:
Yeah, no that’s pretty broad. I guess what that could be is the number of trade lines. You’d like to have three trade lines on there. You should revolving debt, or you’re probably not … Again, that goes to manipulating your credit score. If you have a mortgage or a car or student loans, those are installment debts. The only thing you’re being measured on, the only thing your credit score is based on is whether you’re making those timely payments.

Scott:
That’s all it is, it’s payment history. You want to have those revolving debts because that is that other 35% of your credit score is how you manage that variable debt, your ability to go into debt and pay it off. So, at least one revolving credit line or you’re probably not going to have a credit score.

There are programs that as long as you have a credit score you will qualify. There are other loans programs, like for instance, an FHA manual underwrite, like if you can’t get an automated underwriting approval, and underwriter can physically underwrite it.

Scott:
In situations like that, you need a certain number of trade lines on your credit. For the most part, don’t be afraid of credit. I had a funny story, years ago I had a business, this was probably 30 years ago. I had a business, it didn’t do well, I got into some trouble, fell behind on some credit cards, had a repossession on an automobile, and it’s scared the crap out of me. I’m like, “I’m never using credit again” and I did all cash for seen years. Well, that actually made my credit score go down. It was worse than having bad credit.

Adrienne:
You were like, “Argh.”

Scott:
Yeah, it was the craziest thing, so that’s how I learned this. I learned this by doing the exact same thing most consumers do. I had a little challenge. I was like, “I’m not touching that burner again. That was hot” so I don’t use my credit, I just let it go, I had no revolving credit, and it was horrible.

Then I started the process of getting secured credit cards, paying on those and then you start getting other credit cards, and you get up to three revolving credit lines to manipulate the credit score, and then boom, up above 700.

Scott:
That’s that game that I’m talking about, so what should your credit look like? You should have a score, and if you have those things, so that’s typically what we’ll do with credit repair. I don’t think we’re really going to dive into this this much, but avoid credit repair companies at all costs.

They’re designed to get you to pay a monthly payment for as long as they possibly can, and the way that they go about it is not really the right way of fixing your credit.

Scott:
There are ethical companies out there and like for me, I’ve been doing this for so long and helping people with their credit. As a loan officer, if you’re trying to get a mortgage, your loan officer can probably help you fix your credit and you don’t have to pay anybody.

We know what needs to be done, we can help guide you through that process, but what does it need to look like? You need a credit score, then beyond that, then maybe they’ll look at trade lines, but other than that, and again, don’t do this yourself necessarily.

Scott:
For instance, I have a good friend that helps restore credit, specifically for people that are trying to get a mortgage. He has a credit card like a revolving credit line that is a secured card, that will report within two weeks. We literally can take, and I’ve done this, where somebody has zero credit score, give them this credit card, it reports in two weeks, now we have a credit score and we have a loan.

Adrienne:
Wow, okay. Really good for people to know how to look at all of this and what needs to be on there. Very basic, you need to have a score of some sort.

Scott:
Yeah. I would say that’s step one.

Can We Qualify for a Mortgage After a Foreclosure in 2012?

Adrienne:
Okay. Perfect. Okay, last one in this grouping. “We had a foreclosure in 2012, when can we buy another house?”

Scott:
Yeah, great question. So, again, that depends on the type of loan program that you’re using. The waiting period is going to go from the date that your name came off title, from the old property, so that it’s the day that the foreclosure happened. That’s a matter of public record, it’s easy to track down, and then it depends on what type of loan that you’re using.

Scott:
For instance, just a straight foreclosure, using a Fannie Mae or Freddie Mac conventional loan, there’s a seven year wait from a foreclosure. FHA is only three year wait. VA is only a two year wait, and USDA is a three year wait.

Now, there’s one caveat to that which is with conventional financing, and that is a guideline that they came out with in 2014, and it said that if you filed bankruptcy, and you included your mortgage in the bankruptcy, and the mortgage was discharged through the bankruptcy, and then subsequently down the road later you either had a foreclosure, short sale, or deed in lieu, you could use the bankruptcy waiting period which is four years.

Scott:
That’s probably the most common scenario that I see, because almost everybody got hit with the big crash, 2007-2008. Really hurt a lot of people. Ambulance chasing bankruptcy attorneys came out of the woodwork, started promising people they could save their home if they filed bankruptcy, so that was the primary reason why most people filed bankruptcy from about 2009 to about 2015.

Scott:
So, that’s the situation. But I mean, think about this, let’s spin this back. FHA mortgage, 36 months. 36 months. That’s nothing. If you went through a foreclosure, chances are you’re probably not in a position to jump back in the saddle again. 36 months is nothing to buy a home again after a foreclosure. It varies a little bit, but it is absolutely not the end of the world and I wish more people knew that it’s really not that serious.

Scott:
Bankruptcies and foreclosures, bad things happen to good people all the time. All lenders and everybody knows what the scenario was, what the situation was in 2012, your story is the same as hundreds of thousands of other people. You didn’t do anything wrong, you got into a situation and that was your out.

You’re not negatively judged if you have a past hardship like that. It’s simply a waiting period. Your new loan is the exact same loan as you would have received if you never had the foreclosure. Nothing different. Price isn’t higher, cost isn’t higher, rates aren’t higher, you simply have a waiting period.

Adrienne:
Okay, in this particular example, 2012, if they wanted to buy a home today, they’d have no home doing so, as long as they qualify for the loan of course.

Scott:
Yeah, and well I mean, seven years would be 2019, so depending on what month, what day the foreclosure took place in 2012.

Adrienne:
But they could FHA, right?

Scott:
Yeah. They could do FHA all day long. Three and a half percent down, boom. You’re in. Up to $729,000. That will get you into a home in Orange County.

Adrienne:
Yeah, and really exciting, because I think a lot of the public aren’t aware of these waiting periods, so I was really glad that they asked that question. Glad to hear the answer, too.

Scott:
There’s so much misinformation out there. Again, you go … It’s such a crazy industry. You call a loan officer that has no experience with this, and they’re just going to tell you the wrong answer. And on FindingMyWayHome.com, that was one of the first articles that really blew up and went national, and at one point I was getting about 8000 people a month on the website reading that article for all those guidelines.

Scott:
Because they were literally, every single person was being told no, and they didn’t take no for an answer, and they went and did their homework, and they found somebody who actually had experience with those guidelines. That’s a really, really common source of misinformation from inexperienced loan officers.

But yeah, it’s not nearly as bad as you would think. It feels horrible at the time, but it’s really not that big of a deal.

Adrienne:
Yeah. Okay. Well, gosh, we’ve covered a lot of ground so far.

Scott:
We have. Do I hear snoring? Did we put somebody to sleep over there? The microphone would be on.

Adrienne:
Not me. I’m wide awake. I enjoyed that. So, okay last-

Scott:
We’re just getting started. Let’s go.

Adrienne:
Last group of questions here, and it’s-