TheMReport — News and strategies for the evolving mortgage marketplace.
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20 | TH E M R EP O RT FEATURE G etting a mortgage with a super-prime credit score is easy—and, if today's low interest rates are any indication, it's a good idea. How- ever, borrowers with lower credit scores face significant challenges. According to recent research by Experian, 22 percent of borrowers in the U.S. qualify for the super- prime group with a score above 740. Below them, 36 percent fall into the good-to-prime category— while these are decent scores, they are nothing for lenders to get excited about. Everyone below that—those with a score of 659 or lower—encounters steep obstacles during the mortgage-application process. Lenders check applicant credit scores before they check anything else. As lending rules remain tight after the crash of the late 2000s, risk assessments place many would-be borrowers with bad scores in tight spots. Banks either offer them no options at all or options with outrageous terms, preventing applicants from taking advantage of a good economic climate. "The regulatory atmosphere changed from a risk-management regime to a zero-tolerance and 100 percent-compliance regime," Meg Burns told the Wall Street Journal. "In the face of stiff penalties and aggressive scrutiny, banks were left with a tremendous uncer- tainty and risk that made it hard to keep lending." Brokers shouldn't give out loans to anyone who asks, but people with suboptimal credit scores still have money to spend—and they have to live somewhere. Rather than slam the door on more than half of American borrowers, mortgage brokers should diversify their portfolios to offer reasonable loans to qualified buyers in all credit ranges. Changing the Broker Mindset B rokers need to be impartial in their lending decisions—that's not necessarily a bad thing; how- ever, brokers who put people who are already in tight financial spots into even worse scenarios set them up to fail. That's bad for business. Borrowers who are maxed out on their budgets cannot afford to take on big upfront costs, yet brokers continue to shoehorn low- score applicants into bad options. Why set up low-score applicants to fail with a short-term plan that will drain their finances and create headaches for our side of the deal? It doesn't make sense—yet many brokers continue to do just that. If brokers want to service bor- rowers with lower credit scores, they cannot continue to squeeze applicants into six- to nine-month plans that don't fit. Regulations might prevent brokers from of- fering the world, but brokers can still deliver a diverse range of rea- sonable options without breaking the rules or making bad business decisions. Offering a Range of Better Choices B uyers with low scores should not be limited to strict loans with high upfront costs and ex- orbitant interest rates. These deals only provide a bit of short-term revenue for lenders and lead to massive hassles when borrow- ers inevitably fail to make their payments. More often than not, borrowers with low credit scores are strapped for cash. And the upfront costs of home- ownership present a steep barrier to entry. Interest rates are low, but home prices are high. Brokers who demand 10 or 20 percent down payments (plus closing costs) lock out applicants who would be excellent borrowers. True, traditional loans require that level of initial investment, but that doesn't mean borrowers should have no other alternatives. Brokers should offer a wide variety of choices to people who reside on the bottom half of the credit spectrum. For example, homebuyer-assistance programs exist for organizations ranging from unions to veterans' groups to local governments. These pro- grams can mitigate many of the upfront costs of loans, sometimes rolling the costs into the pay- ments, to make the process easier on buyers with low credit scores who are strapped for cash. Many low-credit buyers are not aware of all their options. But neither should they be expected to. Brokers, as the middlemen between lenders and applicants, should help these prospective borrowers identify the homebuying product or partnership that works best for their unique scenario. "Prospective first-time buy- ers often think the loan pro- cess is too hard and that the Stop Setting Borrowers Up to Fail How mortgage brokers can help low-credit applicants. By Joe Markham