TheMReport — News and strategies for the evolving mortgage marketplace.
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44 | TH E M R EP O RT FEATURE C ountless observers of the housing market in recent years have lamented the impact of more than $1.5 trillion in out- standing student loan debt on the American Dream. As a result of stagnant incomes and the heavy weight of those trillions of dollars of debt, the millennial generation is deferring homeownership until later and later in life. Some have dubbed it the Rentership Society: the notion that the types of large purchases that traditionally served as both a family cornerstone and a vehicle for wealth-building alike are no longer owned by American consumers, but are rather rented month after month. While these financial bur- dens can be significant, there is also reason to believe that the American Dream can be easier to reach with the help of increased financial education. For example, many millennials overestimate what is required to get a mortgage loan, putting homeownership closer to their reach than they may even realize. Common misconcep- tions include the belief that buyers must always put 20% down to purchase a home or that you must have a "perfect" credit score to be considered for a mortgage. Even while they are cause for concern, these misunderstandings also represent a significant op- portunity: by spreading awareness about the number of solutions available now to consumers, mortgage market participants, and policymakers, it is possible to help more young people build credit and achieve the American Dream. Student Debt vs. Consumer Credit T he chief challenge posed by the student debt overhang is that many consumers who are making a large monthly student loan payment don't have the budgetary flexibility to also accommodate a down payment and regular mortgage payments. That budget challenge won't go away until student debt burdens are reduced. Across the mortgage ecosystem, however, we have a duty to ensure that consum- ers with student debt don't face additional hurdles and that they are well-informed about the steps they need to take to build credit and ultimately get approved for loans for major purchases such as homes and cars. FICO regularly examines the intersection of student debt, credit risk, and homeownership, and we've learned that, unsurprisingly, borrowers who reliably repay their loans see an improvement in their FICO Score. In fact, our re- search has found that consumers between the ages of 25–34 years who have paid off their student loans have an average FICO Score (702) that is more than 40 points higher than those with no student loan recorded in their consumer credit file (661). Those with closed student loans are also significantly more likely to have an open mort- gage than those with no student loans on file or those with one or more student loans actively in repayment. That's because student loans are one way for young people to establish a regular pattern of responsible credit behavior, which is the best way to demonstrate creditworthiness to lenders. Beyond simply making regular payments, a student loan can diversify a consumer's "credit mix," a factor that makes up 10% of the FICO Score. And because they are installment loans, rather than revolving loans, student loan debt is weighed less heavily in the FICO Score formula, meaning you can still achieve a high credit score regardless of the amount you owe on student loans. Thus, those student loan bor- rowers who reliably make their payments month after month and who pay down their debts consistently over time will see their credit scores improve and have more opportunities to access credit: In our testing, consumers with an increase in their FICO Score on average paid down their installment loans at a rate that was three times greater than that of consumers who had a decrease in score. Keeping Up B eyond ensuring that the credit scores reflect the responsible repayment of student loans, credit score developers can take additional steps to get a more complete picture of a consumer's ability to repay a loan. In the U.S., approximately 28 million consumers have insufficient data to meet the minimum criteria for calculating a FICO Score (at least one credit account open for six months or more, and at least one account reported to the credit bureau within the past six months), while another 25 million consumers are credit invisible, meaning that they have no credit bureau file. Unsurprisingly, young people are more likely than other consumers to be unscoreable as they begin to establish their credit history. FICO is studying and leverag- ing alternative data that is not part of the traditional consumer credit files maintained by the three larg- est credit bureaus. Incorporating these types of data—such as telecom/utility data or positive checking and savings account be- haviors—into credit scoring models can help provide a more accurate picture for consumers who other- wise are credit invisible or have a Keeping the Dream Alive Innovation, education, and financial literacy are key to busting some long-held misconceptions about credit scores. By Joanne Gaskin