TheMReport — News and strategies for the evolving mortgage marketplace.
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22 | TH E M R EP O RT FEATURE F ollowing the Great Recession, lenders shied away from working with nonprime borrowers, but with a rising-rate environ- ment emerging, many lenders are reevaluating that position, par- ticularly as it relates to so-called "no-score" borrowers. One of the lingering impacts of the recession is the way in which it has informed how individuals manage money. Ten years ago, many of today's homebuyers were either graduating from school and getting started in their careers or were well into their vocation and lost their savings, homes, and jobs. This event taught them valuable lessons about fiscal responsibility and had a two-fold effect: 1) Those of the first category have been slower to enter the housing market than prior generations and 2) They all almost universally have a disdain for carrying debt. This extends to all types of debt, including basic credit cards, which has impacted the industry's ability to apply traditional credit scoring to them. The Truth Behind the Numbers I t's true that millennials have the numbers, but other types of borrowers may not have a FICO score for other legitimate reasons, including: • A borrower who paid off his or her loan/debt balance and no longer utilizes credit, but requires funding to purchase a home; • Borrowers who have not had a mortgage or debt in recent years but need to buy a larger home to accommodate addi- tional family members; and • A legal immigrant or new citizen, who may not have yet built a credit history but has a significant professional back- ground and savings. Unfortunately, many lenders want to treat borrowers like these as low score or subprime, but they are not, and a borrower who demonstrates financial respon- sibility through the pursuit of a debt-free lifestyle should not be penalized for this worthwhile effort. Their intentional avoidance of debt or lack of a FICO score does not make them unqualified for a mortgage or loan. In reality, all it means is that the potential borrower has either paid down all of their past debt or elected to avoid debt outright, which is not a good qualifier of creditworthi- ness. It's an element to keep in mind, but it should not be the sole consideration. In truth, the key qualifier for these mortgage applicants is in their experience with using credit and debt. Millennials entering the market largely fall into the category of "inexperienced credit users," whereas those who have a credit history but have not uti- lized debt in quite some time fall into the "experienced" category. It's those "experienced" credit users who lenders must begin iso- lating from subprime, "low-score," or inexperienced credit users because, in fact, these borrowers are sometimes the most-qualified borrowers. These experienced credit users also frequently have higher than normal reserves. Typically, they have somewhere in the range of at least 15 to 20 months of reserves saved in their bank or retirement accounts, but sometimes, "no- score" borrowers will have closer to 70 or 80 months of reserves. That's almost six and a half years of payments that the borrower could draw on! How to Qualify a No- Score Loan (And Sell It) A lternative credit at its core is simply any definitive proof or justification for a borrower's creditworthiness beyond a traditional FICO score. This can include a potential borrower's history of rent or utility pay- ments, childcare, rent-to-own agreements, or even monthly insurance payments. All of these serve as reliable indicators of a potential borrower's creditwor- thiness. If a borrower successful- ly makes the same payment ev- ery month, has held a consistent job, and has never defaulted on a loan or contract, that person is likely a reliable borrower. Combatting Credit Invisibility "No-score" borrowers are not the same as "low-score" borrowers, but often get treated as such. Learn how to access this vital buyer demographic. By Tom Gillen