Hidden in Plain Sight – How Credit Score Affects Homeownership

It’s not that one borrower is more valuable than another. Every borrower counts all the time, but it’s a matter of serving those who are ready to be served. The problem is that when mortgage originators go in search of growth today, they’re likely to find credit-worthy borrowers in shorter supply compared to the past two years. At least, it will appear that way to many originators.

The truth is that 71% of mortgage applicants with scores below 760 could better their score by at least one 20-point credit band within 30 days, allowing many to qualify for a mortgage. That’s what CreditXpert discovered when examining 24 million mid-score credit inquiries. It’s surprising how many prospective mortgage borrowers are hiding in plain sight, shielded by a credit score that is far below its potential.

When you consider that the No. 1 reason applicants are passed over for a new mortgage is their credit score, you can see how this opens the door to a lot of business that many originators don’t even know is there. To get this business, originators need to have the right tools that open a dialogue with applicants at the right time in the process.

Credit conversation

The “credit conversation” can be difficult for a couple of reasons. First, survey data shows that new mortgage applicants tend to come to a lender with what they think is a very good idea of their credit score. Unfortunately, the score they think they have isn’t typically used by the mortgage industry to underwrite loans.

Another reason is that addressing credit makes it clear to the applicant, if it’s not clear already, that others are probably getting a better deal on the same loan. This is true, of course — that’s risk-based pricing. But discussing credit with your borrower benefits everyone. For applicants, it increases their purchasing power and financing options, often at lower rates. For the lender, it supplies a borrower who is a lower credit risk, reducing the chance of default and potentially increasing the value of the loan in the secondary market.

By having the conversation and tackling the No. 1 issue standing between the applicant and their dream home, the mortgage originator demonstrates that they are sitting on the same side of the table as the applicant. This builds trust and keeps the borrower from working with another lender, which happens more often than you may think. According to the recent CreditXpert survey, consumers consider multiple lenders as they start the process of purchasing a new home or refinancing an existing mortgage. The survey conducted in July 2021 was comprised of 400 people (150 first-time homebuyers, 150 repeat homebuyers, and 100 people who had recently refinanced).

The data showed that 54% of those shopping for new mortgages and 49% of those refinancing considered two to four lenders. Another 21% and 14%, respectively, considered a whopping five to seven lenders. This shopping around likely contributes to the 65%-plus annual growth rate for mortgage inquiries since 2018, according to CreditXpert data, as well as historically broad-based low pull-through rates. And it’s expensive. Looking for a way to decrease your cost to close? One of the most effective ways to “stop the shop” early is by having the credit conversation with applicants at the very beginning of the mortgage origination cycle.

Financial sense

Only one of the multiple lenders shopped by the applicant is going to get the business, and it’s going to be the one that builds the best relationship while offering a great deal on a new mortgage. The others will lose out.

Although it’s difficult to tell exactly how many consumers fall out at the inquiry stage due to credit, CreditXpert conservatively estimated this share at 30% of all inquiries. Furthermore, the company’s Mortgage Credit Potential Index revealed that 52% of applicants with an initial score below 580 could increase their score enough to qualify within 30 days, a time frame well within the normal mortgage origination cycle.

Moreover, the tasks necessary to improve a credit score take place concurrently with the familiar tasks in the mortgage process. Plus, they’re handled by the borrower and do not represent more work for the lending team. Do you see the hidden business in these statistics?

Take, for example, a lender that converted nearly 70,000 inquiries into 46,000 loan applications.
Roughly 7,000 of these inquiries would fall out due to credit. If 34% of these fallouts could achieve a score of at least 640, however, an additional 2,400 inquiries could turn into closed loans. Using the Mortgage Bankers Association’s survey data of independent mortgage banks, which calculated an average profit of $1,099 per closed loan in fourth- quarter 2021, this lender would add another

$2.6 million to its bottom line. Leveraging credit makes good financial sense.

Hard truths

To win trust, mortgage originators have to tell applicants the truth about their credit. This will offer them real hope for bettering their score and qualifying for a loan to purchase their dream home.

Originators need to explain to clients that the credit score they have been tracking is unlikely to be what is needed for the home-purchase process. Last year, when CreditXpert surveyed a nationwide group of consumers, virtually all new homebuyers and those who had refinanced said they already knew or had a good idea of their credit scores before starting the purchase or refi process.

It is easy for mortgage professionals to forget that while applicants enter the loan process with a great deal of credit information, they have little actual credit knowledge. They usually don’t know that the scores they get from credit card companies or on- line sites like Credit Karma are not the FICO scores derived from a merged consumer credit report used in the mortgage business.

You can imagine that this disconnect makes them worry that someone isn’t telling the truth. But ex- plaining that the mortgage industry uses a different model and offering them a path to bettering their score will go a long way toward easing the initial disappointment.

Originators also need to tell their clients that time is on their side. The score an applicant has today is not the score they could have in 30 days if they take action now. If they have more than 30 days, even better. All they need is an action plan.

Let your applicant know that people just like them better their credit scores every day by making smart moves. The tasks necessary for higher mortgage credit scores are worthwhile for every borrower. This should become a regular step at the start of the loan origination cycle, regardless of the applicant’s initial FICO score. All applicants must follow a few recommendations. Naturally, they’re going to ask what those moves are.

Guessing game

Clients need to understand that credit scores are complex. Guessing about what they should do to improve their score isn’t a reliable path to home- ownership. Instead, they should get the facts from someone who knows.

There is a lot of consumer credit information in the market and consumers are wise not to trust much of it. Taking bad advice or relying on what worked for friends who have been through the mortgage process could end up being worse than doing nothing at all.

The same goes for mortgage professionals. Guessing at the steps to raise a credit score, then making these suggestions to potential applicants can (and often does) do more harm than good. Knowing is better than guessing. Fortunately, there are tools available today that create action plans for consumers based on sophisticated predictive models. It’s now possible to provide a simple report to applicants that guides them through the process with no intervention required from the loan officer.

And it can’t be overstated enough that clients need to sit tight until their new mortgage closes. When a consumer’s credit score improves, they are often inundated with offers for new credit products. Opening new accounts while a mortgage is in process will spell trouble for them and their loan. Using credit to buy things for their new home needs to wait until after the loan closes.

Mortgage professionals know this and see it often. If they don’t advise their applicants ahead of time, they will not be successful in converting them to borrowers. Consumers are looking for guidance and a financial adviser they can trust. Originators don’t want to become credit counselors, nor should they.

Luckily, it’s easy and affordable to empower every originator with a document they can hand over to applicants, which will tell them whether they can better their score (with a confidence score) and show them exactly how to do it with a specific action plan. When the mortgage originator explains that this action plan could give the applicant a better deal on a new loan, they win trust and loyalty.

When word gets around that a mortgage originator works to get applicants the best deal, referral business is all but guaranteed. Lenders that empower their originators to do this will be the winners in today’s highly competitive market.

*Article was originally posted in Scotsman Guide: https://www.scotsmanguide.com/pages/magazines/residential-edition