April may be Financial Literacy month, but in the real estate industry, agents rely on the state of their clients’ financials year-round. The current spring market is proving to be an environment in which consumers with healthy financials thrive. It’s never been more important to have good credit—interest rates are trending upward, as are home prices, and a nationwide inventory shortage is creating an ultra-competitive market.
Agents have a responsibility to their clients, whether renters, buyers or sellers, to educate them on staying financially healthy even after a real estate transaction has closed so they can move forward with buying or selling in the future. No easy task, as many U.S. residents do not prioritize saving. According to FinancialLiteracyMonth.com by Money Management International, Americans carry more than $2 trillion in consumer debt, and 30 percent of consumers are living paycheck to paycheck.
This month, agents can help their clients achieve a financially secure future by focusing on the following:
Understanding Real Estate Financials
For most first-time buyers, the financials of real estate are a mystery. Agents should explain to clients that their budget should make room for not only a home’s down payment if purchasing but closing costs for both buyers and sellers. While a lender is responsible for discussing these line-by-line charges, agents should follow up to ensure the client understands and is not being put a financially difficult situation.
Conventional loans typically ask for at least 20 percent down, but there are low-down payment options (for example, FHA loans only require a 3.5 percent down payment); however, agents must remind buyers that any loans with less than 20 percent down require private mortgage insurance (PMI), for which they must budget an additional 0.3 percent to 1.5 percent of the original loan amount per year. The cost varies depending on down payment size and the client’s credit score.
Many new buyers are not aware of closing costs and only budget for a down payment. These can vary depending on where the buyer or seller lives, but typically come to around 5-10 percent of the home’s sale price for sellers and 2-5 percent for homebuyers, according to Zillow.
Seller closing costs may include:
- Commission for real estate agents
- Transfer taxes and recording fees
- Title insurance fees
- Loan payoff costs, which may include prorated interest
- Attorney fees
- Contract contingencies
Buyer closing costs may include:
- Application fees
- Appraisal costs
- Attorney fees
- Closing or escrow fees
- Credit report costs
- Escrow deposit for property insurance and mortgage insurance
- Home inspection
- Title insurance
- Origination fees
- Underwriting fees
- Recording fees
- Fees associated with specialty loans
- Prepaid interest and property taxes
A Healthy Credit Score
Consumers should know that credit scores set the baseline for many segments of the real estate industry. Interest rates, for example, can be higher for those with low credit scores. In addition, homeowners insurance can also fluctuate depending on credit. Even after a transaction has closed, agents should continue guiding clients toward a higher credit score as it will help to ensure they become financially-viable return clients.
Agents can point clients toward one of the three credit bureaus—Experian, TransUnion and Equifax—for tips, which include the following:
- Keep balances low. A low credit utilization ratio with a higher balance of unused credit can bring up a score. Higher credit scores typically have a 30 percent or under credit utilization ratio.
- Don’t open or close accounts. Having too many open accounts can be a red flag to lenders; however, accounts that have been paid off help improve the credit utilization ratio and should not be closed. Longer lines of credit are also a sign of responsible borrowing.
- Set up automatic payments. Since payment history accounts for 32 percent of a VantageScore credit score, and for 35 percent of a FICO score, paying bills on time is essential to maintaining a healthy score.
Tools for Success
There are various apps that help consumers to budget and keep track of their financials. While agents can only provide services for which they are licensed, directing clients to a financial professional or resources is the easiest way to educate without introducing risk.
Agents may consider recommending the following tools to their clients:
- Wally: Helps track expenses by simply taking photos of receipts; the app features geo-technology that can fill out relevant information for each spending occurrence
- Acorns: Rounds up purchases to the next highest dollar and automatically invests the funds in a portfolio of low-cost exchange-traded funds (ETFs)
- Mint: Aggregates all finances in the app and provides tools for budgeting and tracking spending