With the buy market becoming a priority for lenders in 2021, HousingWire met with Mike Darne, Vice President of Marketing at CreditXpert, to discuss credit trends in a buy market and their impact on credit pipelines. lenders.
HousingWire: We know that credit is one of the biggest reasons mortgage applicants fail, how much does that impact a lender’s pipeline?
Mike Darne: The impact of the pipeline is significant and for most lenders the challenge begins at the investigation stage. We estimate, based on HMDA data, that at least 30% of the fallout at the investigation stage is credit related. Far too many of these demands turn into denials. That’s a shame. It doesn’t have to be that way, especially since up to 1/3 of inquiries with initial credit scores below 640 could improve their score enough to qualify.
This type of unfortunate fallout represents missed opportunities for the borrower and the lender. The borrower fails to become a homeowner. The lender is missing out on a loan and a chance to build a lifelong relationship.
HW: Can you share what you see in terms of credit applications as we move into a more buying-driven market?
MARYLAND: There are a few trends to note. First, and this tends to be true historically, the average credit score of applicants declines in a buying market. It makes sense. When we are in a refinancing market, we are dealing with borrowers who are experienced in the mortgage business. This becomes less true in a buying market, especially with so many first-time buyers entering the market.
Second, regardless of the initial credit rating, about 2/3 of borrowers could improve their credit rating by at least one credit tranche. For example, our internal data shows that 73% of those initially in the 620 – 639 band could upgrade to the 640 – 659 band or better. For those with a credit score below 640, improving their score means qualifying for a mortgage when they otherwise wouldn’t. For those with a score above 640, improving their score means improving their financing options and often reducing the interest rate and fees they pay on a mortgage.
The general trend we’re seeing is that the most competitive lenders are tackling credit score improvement early on in the origination process. While this is clearly beneficial to applicants, lenders should also benefit as competition for a smaller number of loans will intensify in the coming year.
HW: Is the credit improvement potential limited to certain types of applicants / certain credit score bands?
MARYLAND: Improving your credit score is for everyone! As I mentioned above, 2/3 of all borrowers could improve their credit score by at least one tranche. About half of them could improve their score by more than one group.
Improving your credit score doesn’t take a long time, nor is it expensive. For the borrower, these are often simple actions that they can take on their own, and those simple actions make a big difference. Paying off debt is a common process. And if you think about it, paying off high interest debt is an investment that the borrower makes on their own. Their debt burden is lower, so their payments and the interest they pay go down. The rate they pay on their mortgage is also likely to be lower. It doesn’t take a lot of lower mortgage rates to save tens of thousands of dollars in mortgage interest. Who wouldn’t make this investment in themselves?
HW: What kind of return could a lender get if they worked to reduce the fallout from credit on pipelines?
MARYLAND: The fallout from the pipeline leaves a lot of money on the table. It is an age-old problem that still needs attention.
Let’s say a lender receives 20,000 mortgage inquiries per year. These investigations resulted 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 loan performance data). These 7,000 closed loans produce $ 14.1 million in production profits.
Now let’s say we apply a credit strategy first by starting at the investigation stage of the origination cycle. This same lender still receives 20,000 inquiries BUT closes 8,300 loans. Instead of $ 14.1 million, our lender now makes $ 16.7 million in production profits. This is a 19% increase in production profits just by telling borrowers the simple steps they can take to improve their credit rating.
We recently conducted a major research study of buy and refinance borrowers. What we have learned is that borrowers largely rate lenders on two dimensions. First, they look for lenders who can offer them the best rate. But we have seen that a borrower’s satisfaction with a lender depends on the quality of their education and communication with them throughout the process. Improving credit works in both dimensions. When a lender works with a borrower to improve their credit rating, they are able to offer the most competitive rate and terms. And for those borrowers who don’t take the necessary steps to improve their credit, the lender has both increased transparency and helped educate them along the way.