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Interesting that someone who does not have what has come to be known as a ‘traditional’ credit score finds it difficult to get a mortgage. It wasn’t that long ago (some of us still remember) when there wasn’t such a thing as a traditional credit score. Loans were underwritten based on the applicant’s profile, including how they paid their debts.
Along came the FICO score that would solve everyone’s problems. A lender could judge the borrower’s intent to repay based on the score; no need to go any further. High score, good risk; low score, stay clear.
But, what about all those people who didn’t develop a score? Shouldn’t they be entitled to own a home? Maybe they don’t like debt and choose to pay cash for most purchases. Is that so bad?
Does the lack of the traditional score, as we’ve come to know it, mean a poor credit risk? Not necessarily.
Experian found that about 64 million consumers do not have a credit score. Further according to FICO rival VantageScore, 10 million of these non-score consumers are considered to be prime, or near prime, borrowers.
That’s quite a few potential home buyers who may not have access to affordable financing to buy a home. That’s lost business to Realtors, lenders, and the economy. Lost opportunities that lenders cannot pass up with rates rising and refinances declining. Every buyer is important.
Those lenders that find ways to service these non-credit score consumers increase their chances for business and income. In a competitive 2017 purchase market, that may make the difference between success and failure. But there is risk, as there is with all lending.
Technology can help to quickly identify those who need special attention. But, in this case, it’s not enough. Not yet anyway.
Originators need to be trained to know what loan programs they have available to serve non-traditional credit consumers and what information is needed for the underwriter’s review.
Good old fashion loan underwriting is the key. Underwriters who can identify and analyze those consumers, that based on other factors, can be approved for a loan and determine what alternative credit can be used to approve them.
These loans must be carefully reviewed in both pre and post close audits to ensure proper and complete validation of all information, including the alternative credit, used to approve the loan. With the proper systems in place to originate, approve and close loans with standard credit, lenders can turn their attention to servicing consumers needing some special attention, like those without the ‘traditional’ credit score.
We’ve come a long way in the use of automation and algorithms to quickly score and approve loans. But, sometimes that just isn’t enough. I’m sure that systems will be developed to score the consumer with a non-traditional way for using credit (whatever that is.) In the meantime, there is still the opportunity to pick up some business servicing these consumers the old fashion way; with traditional loan underwriting.
