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In the never-ending pursuit of more ways to increase homeownership, we now come to another segment of the population which may be deprived of this opportunity. The “Credit Invisibles”, those without a standard credit score (Credit Invisibles).It seems there are between 30 to 35 million consumers who may fall into this category. That’s quite a large number of people being denied access to traditional home financing. The Claude Rains’ of home buyers.
Based on studies done by VantageScore Solutions, the majority of lenders underestimate the number of people falling into this category. Using more modern scoring models, their studies show that these consumers basically perform the same as do those sporting what we consider to be a traditional credit score. Their first-year default rates are very similar. Is there more risk in lending to those without a traditional (FICO) score? Maybe not. Not if you know how to evaluate their use of credit and their credit history. Did you see the “Invisible Man”?
This gets us back to traditional lending; providing money to people who have the capability and willingness to repay the loan. Congress decided that we, as lenders, need a law to ensure we know how to lend and how to determine a borrower’s ability to repay. Seems a little odd to me, but since most lenders today are not actually lending their own money, but selling off their loans, maybe it wasn’t such a bad idea.
Now, as much as ever, lenders need to take the time to analyze their applicants to make sure they are a good repayment risk. As we found out the hard way, this is good for the consumer, the lender, and the industry, no matter where the loan ends up.
Prudent lending policies are still the key to any lender’s success. Be careful that the pursuit of short-term gains doesn’t end up with the realization of long term pains. There is no substitute for a good comprehensive analysis of a loan; said differently, “There is nothing like good old fashioned loan underwriting.”
Automated systems are fine, and they save some time for the good loans but, as usual, the devil is in the details when it comes to the marginal loans or non-traditional lending. Don’t go in blind, carefully evaluate your risk.
The “Credit Invisibles” are out there walking amongst us every day and they want to own homes as well. Can you see them? Do you know who they are? Do you know the risks they present? Can you afford the risks?
Answers to these questions, knowing how to service and approve their loans may open doors for more home buyers and more business for you.
Just be sure you see the risks!
