How Lenders Can Service Borrowers With Low Credit Scores

There’s good news trending across the U.S. and it’s all about credit scores. According to a Washington Post article, the average FICO score is 704, which is a new record high. FICO’s vice president of scores and analytics, Ethan Dornhelm, said that Americans are “making more judicious use of credit” now that 10 years have passed since the financial crisis and housing bust.

Individuals with a FICO score of at least 704 will increase their likelihood of being approved for a mortgage. However, there’s still a chance that people with an average FICO score won’t qualify for a mortgage that easily. Research published by the Joint Center for Housing Studies of Harvard University found that the median credit score for owner-occupied home purchase originations jumped from 700 in 2005 to 732 in 2016. While 732 isn’t too far away from the new average FICO score, it’s still a big difference that could affect whether or not someone qualifies for a mortgage.

And for individuals who have a credit score less than 704, they are going to experience even more hurdles when seeking a mortgage. Data from CoreLogic shows that last year, only 0.1% of conventional first-lien home purchase mortgages were to individuals with credit scores less than 620, while just 3.3% were to borrowers with credit scores between 620 and 659.

Across the board, it’s still pretty difficult to qualify for a mortgage even if an individual has the average FICO score – and that can be very discouraging for first-time homebuyers.

The Best Steps to Getting a Mortgage

While the average FICO score is going up, signaling that more people are taking the steps to develop higher credit scores, mortgage brokers and lenders still have to help ensure that individuals qualify for a mortgage. This help should go beyond the well-known strategies around how to increase someone’s credit score. That’s advice potential homebuyers can easily find online.

To truly provide value to prospective borrowers, here are a few strategies that brokers and lenders should implement to help less creditworthy individuals secure a mortgage loan:

1. Consider all the boxes a borrower can check. In my experience, 580 is a typical bad credit score that brokers and lenders often see. This low number can be the result of medical collections, maxed out credit cards, a life event or late payments. However, 580 is easy to overcome with the right mindset and tactics in place. For example, a less creditworthy borrower might be able to make a big down payment or pay down revolving debts such as credit cards to 30% or less of the credit limit. Usually, borrowers with a 580 credit score will have to compensate by providing a larger down payment – but if they’re able to do that, then one box can be checked.

Another box can be checked if the borrower’s debt-to-income ratio is low. While a borrower’s credit score may not be in the best shape, if their income highly exceeds their debt payments, then that’s another favorable factor that can help the individual qualify for a mortgage.

2. Suggest a cosigner or gift funds. This is a simple, straightforward tactic that can easily solve a less creditworthy borrower’s problems. To qualify for a mortgage, brokers and lenders don’t always need to see a good credit score. Instead, they can look for a cosigner or gift funds from a relative. If someone can help pick up the slack if the borrower can’t qualify on their own, that’s better than not receiving a mortgage at all.

At my company, we sometimes recommend that borrowers with a low credit score seek a cosigner or gift funds from a relative. While it’s not always an easy conversation to have – some borrowers might not know someone they can lean on or ask for help — it’s a solution that still needs to be offered. And it’s a strategy that’s been proven to work. When my company provides a mortgage to less creditworthy borrowers who have a cosigner or gift funds, we rarely run into issues. After all, we are about to experience the greatest wealth transfer in history, according to Forbes – $30 trillion in assets will pass from boomers to their heirs over the next two to three decades. It is good idea to have these discussions as a family, with a mortgage planner and a financial advisor to maximize wealth building strategies and avoid costly mistakes.

3. Get real about their lifestyle habits. Regardless of whether or not prospective borrowers have a cosigner, gift funds or check a couple boxes, there’s one thing that every broker and lender needs to ask them: Is their credit score a result of lifestyle issues or a one-time event that was a detrimental setback?

Sometimes potential borrowers will have a lower credit score because they were in a bad circumstance or experienced a challenge that put a dent in their credit score. Maybe the less creditworthy borrower lost their job or business and had to file bankruptcy, or experienced health issues that required expensive doctor appointments they couldn’t afford. One-time events like this can be forgiven by brokers and lenders.

However, if borrowers have a lower credit score because they created a fancy lifestyle they couldn’t afford, then it’s going to be much harder for them to qualify for a mortgage loan. Lifestyle issues don’t warrant trust with most lenders, and as a result, these less creditworthy borrowers will either have to provide a large down payment or forget about qualifying for a mortgage altogether.

While getting a mortgage today can be difficult without the right credit score, it’s not impossible. If lenders and brokers offer practical, straightforward advice to less creditworthy borrowers, then approving and funding a mortgage won’t seem like a dead end.

Bill Lyons is founder and CEO of Griffin Funding. He can be reached at 888-721-0003 or william@griffinfunding.com.