Today’s mortgage brokers and lenders are looking for higher credit scores, leaving worthy borrowers with fair credit scores struggling to find reasonable rates on mortgages. Research from the Joint Center for Housing Studies at Harvard University found that the median credit score for owner-occupied home purchases jumped from 700 in 2005 to 732 in 2016. With brokers becoming more selective about credit scores, plenty of would-be homeowners with fair credit scores find themselves overlooked by banks.
No one wins when lending standards are imbalanced. Borrowers want to own homes, but no one will lend them the money. Lenders want to make money, but they pass up opportunities to extend credit to people with the means and disposition to pay them back. To correct this issue, lenders must adjust their approach and start providing reasonable loans to qualified buyers.
WHY GOOD PEOPLE DON’T GET MORTGAGES
Brokers and lenders still feel the heat from the financial crisis of the late 2000s. After the bubble popped, the U.S. government implemented new regulations to limit the likelihood that subprime lightning would strike twice. Unfortunately, those regulations — while a necessary step to curb bad practices — made lenders a little too gun-shy about lending to anyone with less-than-perfect credit.
Right now, buyers are being squeezed by those regulations. Interest rates remain exceptionally low, and people with money to spend are eager to put their savings into homes at great prices. When banks won’t finance their loans, people get frustrated and banks miss out on dependable revenue.
Recent government actions have softened the regulatory climate, though. Rollbacks to the Dodd-Frank Act from the Trump administration give bankers more leeway than they enjoyed in the years immediately after the crash. However, if banks are to correct the imbalanced environment, they must use their newfound breathing room to extend more (responsible) loans to people who have good enough credit to deserve them.
HOW BROKERS CAN WORK WITH GOOD-TO-PRIME CREDIT
Borrowers with prime credit are lenders’ best friends. They pay on time, default infrequently, and generally keep the mortgage lending process simple. Borrowers with good credit, while not as desirable as their prime brethren, still offer lenders a dependable avenue to earn income on mortgage loans.
Lenders should follow these three steps to provide loans that work for both sides:
1. Diversify the portfolio
If brokers want to service borrowers with lower credit scores, they have to give those borrowers a fair shot. Too often, lenders offer six-month plans to which borrowers can’t commit, losing the deals and frustrating the buyers. Rather than hold every applicant to the highest standard, banks should offer a diverse range of loan options to attract qualified buyers of all kinds.
Home loans come in a multitude of flavors. Thanks to homebuyer assistance programs, many different types of buyers can qualify for loans they might not expect. Banks should work with these programs to offer their customers a range of options to fit their needs. Down payments and closing costs can frighten first-time homebuyers, but with a little knowledge and assurance, these fledgling borrowers can become big income sources for lenders who serve them.
2. Use blockchain to simplify the process
The mortgage industry used to operate in a series of stops and starts. Thanks to blockchain, that clunky process has become a streamlined, efficient machine that provides accurate information to everyone involved.
Blockchain offers an immutable audit trail for brokers and lenders to follow when verifying applicant information. This prevents borrowers from modifying information after the fact, creating a trustless process that eases the concerns of banks that service borrowers with lower credit. Blockchain also allows brokers to pull financial information (such as pay stubs) directly from the source, ensuring every document is trustworthy. This works across borders as well, which can help lenders handle their share of the $135 trillion in cross-border payments made annually.
Lenders can even use blockchain to track payments after the mortgage is signed, making it clear which borrowers are keeping up with their payments and which need closer attention.
3. Put education above rejection
Mortgage brokers are quick to deny and slow to explain. Rather than leave borrowers frustrated by their predicaments, lenders should provide tips to help their customers increase their credit scores to qualify for better rates.
Improving a credit score is a simple process, if not an easy one. Lenders should encourage prospective borrowers to keep track of their scores through their banks or through free services online.
Meanwhile, borrowers should understand that each credit bureau — Equifax, TransUnion, and Experian — calculates scores differently. They should also understand that they can fix their credit scores quickly by removing inaccurate information. If an account appears in error or if an on-time payment shows as missed, the person affected can dispute the issue with each bureau, who will remove the inaccuracy and provide an immediate (and often significant) boost in score.
People with great credit scores aren’t the only ones with money to spend. Lenders have an opportunity to serve a much wider, more profitable market, but to do so, they must broaden their horizons. By offering a wider range of options and using blockchain technology to create a trustless process, banks can increase their revenue while providing the loans that good borrowers deserve.