Tuesday Tuneup- #24
Spotlight on Financing Terminology
Happy Tuesday everyone!
Thank you so much for all the feedback from last weeks edition and I’m glad it was helpful for many of you.
I know that for many of you, the world of finance is somewhat new and this week I wanted to cover some of the most common terms that you are going to hear. The goal, is to help you feel confident when you talk to customers, go to training’s, ECT. As we all know, if you’re not confident, you’re not going to be successful in sales.
As residential construction sales reps, understanding financing options is essential for helping clients navigate the complexities of purchasing and renovating homes. Knowledge of basic financing terminology can significantly impact your ability to close deals and assist homeowners effectively. In this edition, we spotlight key financial terms that will enhance your expertise and improve your sales performance.
Debt-to-Income Ratio (DTI)
Debt-to-Income Ratio (DTI) is a financial metric that compares a person's monthly debt payments to their monthly gross income. Lenders use this ratio to determine a borrower’s ability to manage monthly payments and repay debts.
Calculation: To calculate DTI, divide the total monthly debt payments by the gross monthly income. For example, if a homeowner has $2,000 in monthly debt payments and a gross monthly income of $6,000, their DTI is 33.3%.
Importance: A lower DTI ratio indicates a better balance between debt and income, making borrowers more attractive to lenders. Most lenders prefer a DTI of 50% or lower for residential construction loans.
Application in Sales: This is one of the most common reasons customers get declined for financing. Understanding what lenders are more lenient with DTI can help you turn those declines into sales.
FICO Score
The FICO Score is a type of credit score created by the Fair Isaac Corporation. It is one of the most widely used credit scoring models by lenders to evaluate the creditworthiness of potential borrowers.
Components:
Payment History (35%): Timely payments on credit accounts.
Amounts Owed (30%): The total amount of credit and loans currently being used.
Length of Credit History (15%): The duration of the credit accounts.
New Credit (10%): Recent credit inquiries and newly opened accounts.
Credit Mix (10%): The variety of credit accounts (e.g., credit cards, mortgages, auto loans).
Score Range: FICO scores range from 300 to 850, with higher scores indicating better creditworthiness. A score above 700 is generally considered good, while a score above 800 is excellent.
Application in Sales: Knowing a client's FICO score can help you identify the best financing options for them. Higher scores typically qualify for lower interest rates and better loan terms. If a client has a lower score, you can discuss strategies to improve it, such as paying bills on time, reducing debt, and avoiding new credit inquiries before applying for a loan. Worth mentioning that there are different versions of FICO scores. So, when a customer gives you a number, it’s best to think of that as a “Close guess” rather than a definitive number.
Hard vs. Soft Credit Pull
When lenders check a person's credit, they conduct either a Hard Credit Pull or a Soft Credit Pull.
Hard Credit Pull: This occurs when a lender reviews a borrower's credit report as part of the loan approval process. It can temporarily lower the borrower's credit score.
Soft Credit Pull: This is a preliminary credit check that doesn't affect the borrower's credit score. It's often used for background checks or pre-qualification.
Importance: Understanding the difference between these two types of credit checks is crucial when advising clients. Hard pulls can impact a client's credit score and should be minimized, while soft pulls can be used more freely without affecting creditworthiness.
Application in Sales: Explain to clients the implications of hard and soft pulls, and reassure them when a soft pull is used for pre-qualification. This transparency helps build trust and reduces anxiety about the financing process. Many customers are worried about running credit because it can impact their score, but this is not the case with a soft pull.
Dealer Fee
A Dealer Fee is a charge that a lender may impose for arranging financing. This fee can vary widely and may be a flat rate or a percentage of the loan amount. Typically, the lower the interest rate, the higher the fee.
Components: Dealer fees can include administrative costs, loan processing fees, and other miscellaneous charges. For example, if a loan is made for $30,000 and has a 10% dealer fee, the loan would pay out only $27,000 to the contractor. The fee would be $3,000 (10% of the $30,000) and would be withheld.
Importance: Understanding dealer fees helps in explaining the total cost of financing to clients and in negotiating better deals.
Application in Sales: Dealer fees eat up margin and you need to account for it in your pricing. Also, not all customers are interested in paying higher prices for lower interest rates… and vice versa. Some people want a lower rate and don’t mind paying for it. Get comfortable with both scenarios and help guide a customer through those options.
The Three Credit Bureaus
The Three Credit Bureaus—Equifax, Experian, and TransUnion—collect and maintain consumer credit information. They generate credit reports used by lenders to assess creditworthiness.
Equifax: Provides credit monitoring and fraud protection. They offer various services, including credit scores and credit reports.
Experian: Offers identity theft protection and credit score tracking. They are known for their extensive data and analytics capabilities.
TransUnion: Delivers credit reports and credit score insights. They provide tools for consumers to manage their credit health.
Importance: Each bureau may have slightly different information, so it’s important for clients to check all three reports regularly.
Application in Sales: Educate clients about the role of the three credit bureaus and encourage them to review their credit reports from each bureau to ensure accuracy and identify any discrepancies. Some lenders will pull all three bureaus and this is called a “TriMerge”
Subordination
Subordination is a process in which a loan or debt is given a lower priority compared to another loan or debt in case of a default or foreclosure. This means that in the event of liquidation, the subordinated debt will be paid after the higher-priority debts have been satisfied.
Purpose: Subordination agreements are often used when a borrower takes out a second mortgage or home equity loan while still having an existing primary mortgage. The primary mortgage retains priority, and the second mortgage is subordinated.
Importance: Lenders typically require subordination to ensure that their loan is prioritized in case the borrower defaults. This process helps manage risk and ensures clear hierarchy among multiple debts.
Application in Sales: When advising clients on refinancing or taking out additional loans, it’s important to explain subordination and how it affects the priority of their debts. This understanding helps clients make informed decisions about their financing options.
Liens
A Lien is a legal claim against a property that must be paid off when the property is sold. Liens are often used as collateral for loans.
Types: There are various liens, including mortgage liens, tax liens, and mechanic’s liens.
Mortgage Lien: Secures the loan used to purchase the property.
Tax Lien: Imposed by the government for unpaid taxes.
Mechanic’s Lien: Placed by contractors for unpaid work or materials.
Importance: Understanding liens is crucial when advising clients on property purchases and ensuring all claims are resolved.
Application in Sales: Ensure clients are aware of any existing liens on properties they are interested in. This knowledge helps in negotiating deals and ensuring clear property titles.
UCC1 Fixture Filing
A UCC1 Fixture Filing is a legal form filed by a creditor to secure interest in personal property that becomes a fixture on real property.
Purpose: It ensures the lender has a claim on fixtures (like solar panels or HVAC systems) attached to the property.
Importance: This filing protects the lender’s interest in the installed fixtures and is critical in securing financing for home improvements.
Application in Sales: Understanding UCC1 filings helps in explaining financing options for home improvements and ensuring clients understand their obligations. This knowledge is particularly relevant for sales reps in solar, roofing, and HVAC industries.
Payment Factor
The Payment Factor is a multiplier used to calculate monthly loan payments based on the loan amount and interest rate.
Calculation: Payment Factor = (Monthly Interest Rate) / (1 - (1 + Monthly Interest Rate)^-Number of Payments).
Importance: It helps in quickly estimating monthly payments and explaining financing terms to clients.
Application in Sales: Use the payment factor to provide clients with accurate monthly payment estimates. This clarity helps clients understand the financial commitment involved and aids in decision-making.
Finally, If you found this edition enlightening or helpful, Please share it with somebody who could use the advice (We all know somebody). The more ideas I get, the better the content for all of us. If it brought you none of that and was a complete waste of time…. then please let me know! I appreciate the help either way!
