With the purchase market becoming a primary emphasis for lenders in 2021, HousingWire sat down with CreditXpert VP of Marketing Mike Darne to talk about credit trends in a purchase market and how that impacts lenders’ pipelines.
HousingWire: We know that credit is one of the top reasons mortgage applicants fall out, to what extent does this impact a lender’s pipeline?
Mike Darne: The pipeline impact is significant and for most lenders, the challenge begins at the inquiry stage. We estimate, based on HMDA data, that at least 30% of fallout at the inquiry stage is credit-related. Far too many of these inquiries become denials. That’s too bad. It does not have to be that way, especially since as many as 1/3 of inquiries with initial credit scores below 640 could improve their score enough to qualify.
This unfortunate type of fallout represents missed opportunities for the borrower and the lender. The borrower fails to become a homeowner. The lender misses out on a loan and a chance to build a life-long relationship.
HW: Can you share what you are seeing when it comes to credit inquiries as we move into a more purchase-driven market?
MD: There are a few trends to note. First, and this tends to be historically true, the average credit score of applicants declines in a purchase market. It makes sense. When we’re in a refinance market we’re doing business with borrowers that have experience with mortgage loans. This becomes less true in a purchase market, especially with so many first-time buyers entering the market.
Second, regardless of the initial credit score, approximately 2/3 of borrowers could improve their credit score by at least one credit band. For example, our internal data shows that 73% of those initially in the 620 – 639 band could improve to the 640 – 659 band or better. For those with a credit score less than 640, improving their score means qualifying for a mortgage when they otherwise would not. For those with a score greater than 640, improving their score means improving their financing options, and often lowering the interest rate and fees they pay for a mortgage.
The over-arching trend we’re seeing is that the most competitive lenders are tackling credit score improvement early in the origination process. While this is clearly beneficial for applicants, lenders also stand to benefit as competition for a smaller number of loans heats up in the coming year.
HW: Is credit improvement potential limited to certain types of applicants / certain credit score bands?
MD: Credit score improvement is for everyone! As I mentioned above, 2/3 of all borrowers could improve their credit score by at least one band. About half of those could improve their score by more than one band.
Credit score improvement doesn’t take much time, nor is it expensive. For the borrower, it often involves simple actions they can take on their own, and these simple actions make a big difference. Paying down debt is a common move. And if you think about it, paying down high-interest debt an investment the borrower is making in themselves. Their debt burden is lower, so their payments and the interest they pay decrease. The rate they pay on their mortgage is likely to be lower, too. It doesn’t take much of a decline in mortgage rate to save tens of thousands of dollars in mortgage interest. Who wouldn’t make that investment in themselves?
HW: What kind of return could a lender see if they worked to reduce pipeline fallout from credit?
MD: Pipeline fallout leaves a lot of money on the table. It’s an ages-old problem that still needs attention.
Let’s say a lender gets 20,000 mortgage inquiries a year. These inquiries result in 7,000 closed loans. Now let’s say the average production profit per loan is $2,013 (which is a three-year average based on MBA lending performance data). Those 7,000 closed loans produce $14.1 million in production profit.
Now let’s say we apply a credit first strategy beginning at the inquiry stage of the origination cycle. That same lender still gets 20,000 inquiries BUT they close 8,300 loans. Instead of $14.1 million our lender now realizes $16.7 million in production profit. That’s a 19% increase in production profit simply from pointing out to borrowers the simple actions they can take to improve their credit scores.
We recently fielded a major research study with both purchase and refinance borrowers. What we learned is that borrowers largely evaluate lenders on two dimensions. First, they look for lenders that can offer them the best rate. But we saw that a borrower’s satisfaction with a lender is based upon how well they educate and communicate with them throughout the process. Credit improvement delivers across both dimensions. When a lender works with a borrower to improve their credit score, they are able to offer the most competitive rate and terms. And for those borrowers that don’t take the steps to improve their credit, the lender has both increased transparency and helped educate them along the way.