Residential Magazine

These Clients Are Waiting to Be Seen

With ‘credit invisibles,’ there’s a difference between no-credit and low-credit applicants

By Tom Gillen

When it comes to mortgages, the credit score is still king. Unfortunately for some borrowers, it also can be the first stumbling block, since the FICO score can be the biggest deciding factor in the entire loan process.

In today’s market, a growing number of borrowers fall outside the standard models traditionally used to qualify for lending. Often referred to as “credit invisibles,” this demographic represented an estimated 19 percent of the U.S. population (or about 45 million adults) as of 2010, according to the Consumer Financial Protection Bureau.

As these numbers increase, many lenders, once hesitant to work with these borrowers, are now reconsidering. Many of these individuals have no credit score rather than a low one, which can be vastly different in terms of what kind of borrower they will be. It is these “no-score” borrowers that often present the best opportunities for lenders and the mortgage originators who do business with them.

Credit footprint

Simply put, no-score borrowers are those without a credit footprint. Often, these are younger consumers such as millennials or Generation Z, who tend to be inexperienced credit users.

Many no-score borrowers, however, may actually have a strong background of responsible credit use. Although they are often lumped in with their low-score counterparts who may have misused credit in the past, these individuals could have demonstrative evidence of their ability to repay a mortgage due to past experience.

The aftermath of the Great Recession left many consumers with an increased desire to avoid credit and pursue a debt-free lifestyle. Often, these individuals paid off their mortgages, auto loans and credit cards long ago and now only use cash. Without regular or revolving payments, their FICO score could completely disappear in as little as six months.

These no-score borrowers are generally experienced with credit and could easily qualify to borrow again, but as the system is currently set up, this is rarely the case. Even if they avoid getting lumped in with the low-score borrowers when applying for a mortgage or other loans, they often still end up being lumped in with those inexperienced borrowers with little credit history. Unfortunately, this typically puts them on the same terms as low-score or subprime borrowers when it comes to their mortgage.

Although it is true that past paid debts or avoidance of new debt is not necessarily the perfect qualifier of creditworthiness, neither should it be completely ignored. Likewise, neither should a potential borrower’s credit score be the sole consideration in the process.

Instead, lenders and mortgage originators also should consider whether a no-score borrower is an “inexperienced” versus “experienced” credit user. The latter usually have credit history and, thus, are experienced at managing debt. It is these borrowers that are often the most qualified.

New insights

As demographics shift, alternative credit data is becoming more and more accepted. This now includes any data beyond the traditional FICO score, such as employment histories, rental- or utility-payment histories, monthly insurance payments or peer-to-peer lending histories.

These new data types have the potential to offer insights into a borrower’s creditworthiness as consistent employment and payment patterns are usually positive signs. What’s more, with today’s increasingly digitized relationship between lenders and borrowers, digital tools and mobile apps can help monitor potential borrower behaviors and create new methodologies for evaluating their creditworthiness.

A borrower’s commitment to live debt-free means they may have access to much higher financial reserves than what is standard. Often, these no-score borrowers have upward of 70 to 80 months of reserves in their bank or retirement accounts. Having almost six and a half years of potential payments saved up makes a new loan a much safer risk.

Additionally, because of these large cash or investment reserves, these borrowers also are likely to have a much lower debt-to-income (DTI) ratio. The standard for most mortgage borrowers today is usually about 36 percent DTI. Many no-score borrowers often prefer and even seek out mortgages with a DTI closer to 25 to 28 percent, further reducing the risk of default.

Although no-score loans can be a solid bet for lenders and originators, one concern is how they are viewed and packaged by non-deposit lenders for the secondary market. Often, these loans must be manually underwritten instead of going through the government-sponsored enterprises’ (GSEs’) automated underwriting systems. If so, a GSE will charge a significant risk-based price adjustment. In addition, a GSE will most likely require a buyback of the loan should it default.

Unfortunately, many lenders pass these fees and added costs on to borrowers. Punishing them for being financially responsible and making intelligent credit decisions, however, is not only wrong but could cost a lender future business opportunities. Establishing good relationships, especially with first-time borrowers, can make them lifelong clients — not to mention any friends and family they may refer.

Lenders also should consider that no-score borrowers often pay down a loan much faster than many traditional borrowers. Because of this, many prefer 15- or 20-year conventional mortgages, which can dramatically lower the associated GSE fees.

Changing market

Coupled with these shifts in borrower demographics, the market is changing. In the coming years, the structure of mortgages will play a much more significant role than it has in the past. Although the 30-year, fixed-rate loan is likely to remain the industry standard, that does not necessarily make it the best option for everyone. Lenders and originators will need to recognize this in order to bring additional value to the table.

Lenders should not only know their market and products, they also should know their borrowers. Being a trusted guide, adviser and expert, as well as understanding a client’s long-term financial goals, can offer tremendous value. Gone are the days where a lower interest rate was the main competitive advantage — today’s borrowers expect more.

Ensuring the right loan, for the right borrower, at the right time, is crucial. What’s more, with many borrowers wary of lenders at the start of the loan process, doing the right things can allow lenders to establish solid relationships and set themselves apart from the competition. Advanced technology also can help lenders and originators offer additional value to their borrowers. Providing advantages such as pre-underwriting and digital tools to support a borrower’s home-search needs can further cement those relationships.

As the number of no-score borrowers continues to grow, so too will the need — and opportunity — to cater to them. Because many lenders still view them in the same light as subprime or low-score borrowers, however, both the needs and opportunities often go unrealized.

• • •

Although credit scores are important, lenders and originators should not ignore the growing number of “credit-invisible” borrowers. Those who choose to look beyond the score to work with these no-score borrowers and help them build a pathway to home-ownership around their lifestyle are not only doing the right thing — they also are positioning themselves for a better future as a lifelong financial resource for borrowers.


  • Tom Gillen

    Tom Gillen is senior vice president of capital markets for Churchill Mortgage. He brings more than 20 years of experience as a financial-services executive, with expertise in business development, product innovation and organizational leadership. Churchill Mortgage is privately owned by its more than 400 employees. A full-service and financially sound leader in the mortgage industry, the company provides conventional, FHA, VA and USDA residential mortgages across 44 states.

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