The Crucial Nature of Credit: How First-Time Homebuyers with Less-Than-Stellar Scores Can Better Their Chances of Being Approved for a Mortgage

In a Nutshell: In the decade since the mortgage crisis, banks have stepped up requirements for anyone looking to finance a home. First-time homebuyers, and especially those with less-than-perfect credit, are now subject to increased scrutiny. However, many prospective buyers can benefit from conversations with experts who know what it takes to be approved for a mortgage loan. One such expert is Acopia Home Loans loan originator Craig Berry, who recently shared some advice with us on overcoming credit challenges. By understanding the nuances of his clients’ credit reports and explaining strategies for fixing the problems standing in the way of approval, Berry is able to help many first-time homebuyers achieve their dreams.

In 2005, my then-girlfriend and I began looking into buying a home together.

We found the process of applying for a loan to be surprisingly pleasant. It was not at all what we had been cautioned to expect, and we discovered that we easily qualified for the loan we needed on the house we were looking at.

At the time, we thought nothing of being “creative” with our income statements on the loan docs. As our Realtor, and even the loan officer, said, everyone does it. Of course, we all know where that eventually led.

Fast-forward a dozen years, and we’re still in our home, although we had to take advantage of the government’s HARP program to make that possible. And the amount we lost in the value of our house in the 2008 financial crisis is something neither of us wants to contemplate.

These days, first-time homebuyers are faced with a far more rigorous landscape when shopping for a mortgage. And it can be even worse for the would-be homeowners out there with credit issues.

Since the financial crisis of a decade ago, banks and lending institutions have stepped up their scrutiny of new homebuyers. Credit reports are gone over with a fine-toothed comb, and that magic number — your credit score — is more important than ever. So, what are prospective first-time homebuyers to do in this environment?

To find out more about their options, we recently reached out to a seasoned mortgage originator who has seen the industry through good times and bad. Craig Berry has nearly 20 years of experience in the mortgage industry and currently runs the Acworth, Georgia, branch for Acopia Home Loans.

Craig Berry, Loan Originator for Acopia Home Loans, told us about how mortgage experts can often work with prospective homebuyers to improve their credit and eligibility for a loan.

“When people have credit challenges, what I tend to do is to get granular and try to figure out why their credit score is the way it is,” Berry said. “For example, two people might have a 600 credit score, and I can get a loan for one of them but not the other. The reason may be a bankruptcy or a foreclosure in the recent past, and the mortgage companies just don’t want that risk.”

He went on to explain that, a decade ago, the mortgage companies had no problem selling their loans to investors and getting them off the books, so quality was less important. They bundled subprime loans with other higher quality loans to be sold as a package. These days, of course, things are very different.

During the run-up to the financial crisis, mortgages were often approved without requiring proof of the borrower’s income or assets. These so-called ‘liar loans’ were often encouraged by lenders who wanted to approve more loans to feed the investor pipeline. By 2008, these practices had resulted in nearly $500 billion in mortgage defaults.

While it is incumbent upon each of us to make sure we can afford the mortgage we’re applying for, the programs that lenders had in place at the time made it seem as if anyone could buy a home. Interest-only and option-ARM loans made payments affordable — for a time. And if you couldn’t afford the down payment, there were ways around that, too.

This is the backdrop for today’s heightened scrutiny of homebuyers and is a big reason why new buyers are finding the approval process difficult.

“Back before the collapse of the housing market a decade or so ago, there were a lot of programs to get first-time homebuyers qualified for mortgages,” Berry said. “Many of them were simply based on the credit score of an individual and had very little to do with whether or not they could afford the mortgage. Literally, almost anybody could get a loan — but, of course, all of that has changed.”

The focus by banks and lenders now is more about making sure people can afford the mortgage they’re applying for. And that’s where experts like Berry come in, helping first-time homebuyers — even those with past credit missteps — qualify for a mortgage they’ll be able to afford in the long run.

Most consumers understand that their credit score is a representation of their creditworthiness and helps a lender determine how likely they are to pay back their loan in full and on time. Since the FICO credit scoring model is so widely used and accepted, lenders rely on this number as a benchmark for practically all of the loans they make. But there are some nuances to credit scores that require a little explanation to understand their full impact.

“What it often comes down to is someone will call me and say they have a 589 credit score, according to the free app they just downloaded or according to their latest card statement,” Berry said. “But, when I pull their credit, they actually have a 620 score because they didn’t realize the middle score is what matters. Or they may have a 530 because the 589 was just one of the scores and not the middle score.”

That middle score Berry is referring to is important, since that’s usually what lenders will use when considering you for a mortgage.

There are three major credit bureaus: Transunion, Equifax, and Experian. Let’s say you have a Transunion score of 620, an Equifax score of 580, and an Experian score of 590.

In this case, the middle score of 590 from Experian is the one lenders will use. It’s also important to know that it isn’t an average of all your scores, but rather the exact score from the middle of the three.

Another important tip Berry gave us was something of a mortgage industry insider’s tool for running “what-if” scenarios on a homebuyer’s credit. This involves using a credit score simulator to model what could happen to a score if certain conditions were different, such as paying down a credit card balance or getting a new card to increase the total available credit. He also told us about another tool called a credit analyzer.

“The credit analyzer allows you to model the best way to put a certain amount of money in personal assets to work to yield the best results for the credit score. It’s a very thorough and informative way of finding out the most effective use of assets in paying down debt,” Berry said.

A credit analyzer can give you specific actions to take in paying down debt, transferring balances from one card to another, or even opening a new secure line of credit. Following the analyzer’s recommendations can sometimes rapidly increase your credit score by a significant margin.

One thing Berry stressed throughout our conversation was the point that no two individual credit stories are the same. Two people may have the same score and get different results when applying for a mortgage.

“It all comes down to the specifics of an individual’s credit history,” Berry said. “Sometimes, it could be just a couple of late payments on a credit card. In other cases, it could be because you have all of your credit cards maxed out.”

Watch on

He stressed the importance of seeking advice from a professional who knows the mortgage industry and knows what lenders are looking for. Often, it can be a simple matter of fixing a few mistakes on your credit report or paying down some existing debt. But the first step is to understand why a score is low.

“I tell clients, ‘First, let me take a look at your credit so we can figure out where to start.’ The whole idea is that even if my credit inquiry hits your report for three points, what I’m going to give you in return will bring it up a lot more than that. But first, we have to know where it is so we can come up with a plan for how to make it better,” he said.

And that’s the kind of expert advice that can mean the difference between getting approved for the mortgage you want and getting turned down.