As a mortgage broker, you can be the bridge between a future homeowner and the home of their dreams. Unfortunately, since the mortgage crisis of 2008, certain fraudulent practices that lead to speculative lending were revealed, affecting the entire industry.
While many of the offenders are now out of business, regulations have gotten tougher for those of us that remain. The first hurdles to a satisfying career are obtaining your mortgage broker bond and license, and this is what we’ll look at in this article.
For people with bad credit, the licensing and bonding process can be a bit complicated, but don’t let that discourage you. As long as you understand how surety bonding with bad credit works, you have great chances of getting bonded.
If you’re new to the field, here’s everything you need to know about mortgage broker bonds and how your credit score affects your cost:
Insurance for Your Customers
The first thing you need to know about surety bonds is that they serve as protection for your customers. Unlike insurance, which you buy for your own peace of mind, mortgage broker bonds are actually a legal requirement to ensure your clients are financially protected should they face loss as a result of unsound brokering practices.
It’s important to understand that many states wоn‘t issue you a mortgage broker license if you don’t purchase a bond first.
Mortgage broker bonds are underwritten by surety companies. They evaluate your application and if they issue a bond, this means they are legally responsible in case you break the rules and somebody files a claim against you. If the claim proves valid, the surety issues monetary compensation for your customer.
Then, you must pay back the surety company. With this in mind, it’s not surprising that your credit score plays a very important role in determining the cost of your bond.
Your Credit Score’s Role
The surety company can be left on the hook for claims if you are not able to repay them, so they want to make sure they work with principals who fulfill their obligations. They take your credit score as a measure of that ability, just like a bank does when you apply for a loan.
And just like with a bank loan, a low credit score makes you a high-risk applicant, meaning you need to pay a higher annual premium. Typical rates for mortgage brokers with good credit are between 1% and 3% of the total bond amount.
A low credit score (a FICO of 650 or less) will still allow you to get a mortgage broker bond, but at a higher premium, which can go as high as 15%. Other credit issues such as past bankruptcies, civil judgments or tax liens can have a similar effect.
As a quick comparison, if you had to get a $20,000 mortgage broker license bond, you might pay just $200 per year if you have a stellar credit standing (1% rate), or as much as $3,000 if you have poor credit (15% rate).
Other credit issues such as past bankruptcies, civil judgments or tax liens can have a similar negative effect on the price of your bond.
It’s important to note that your credit score is generally not a deal breaker for surety companies, though there are two exceptions to this rule: an open bankruptcy and late child support payments. If you currently have an open bankruptcy, you need to make sure it’s closed before you apply for your bond, or you’ll be rejected.
How to Get the Lowest Premium
The difference between a premium of 1% and 15% can be rather big, so it’s smart to put your best foot forward when submitting your application.
Working on your credit score is obviously what will have the biggest impact on your premium, but as we all know, this isn’t something you can accomplish overnight. The good news is that there are a few things you can do right now.
Surety companies often look into additional factors before they give you a quote. Among them are your financial statements. If you demonstrate strong revenue growth, this will offset some of the negative impact of your bad credit score. Keep in mind that past due receivables don’t count towards your financial statement, so before you apply for a bond, be sure to collect everything people owe you.
Another important factor in bonding are your years of professional experience. If you are an experienced broker or have worked in financial institutions before, be sure to reflect that in your resume when you’re applying for or renewing your bond.
These are the most important points to understand about mortgage broker bonds. Even if you have bad credit, don’t be discouraged as there is a lot you can do to help lower your premium, get bonded and licensed, and start doing the work you love.
Are you a licensed broker? Share your tips on getting licensed and bonded with your fellow mortgage brokers.
Lachezar Stamatov has rich experience in blogging about all surety bond related topics with a focus on small business and the mortgage industry. He is a frequent contributor for JW Surety Bonds.