A Credit First Approach to Mortgage Lending

By | January 19, 2022

Predictions of a changing market are now coming to life

By Michael Darne

Even though the Mortgage Bankers Association specifically warned the industry as early as October 2020 that mortgage loan volume would fall in 2021, the incredibly hot real estate market led many to believe that the trade group’s economists may have missed the mark as it appeared that consumers just couldn’t stop buying homes.

But all good things must come to an end.

By early October of this year, Fannie Mae’s consumer sentiment survey showed that only 28% of respondents felt like now was a good time to buy a new home, while 66% disagreed.

It was the continuation of a trend Redfin identified in August, when it reported that home sellers were noticing that the market was no longer heating up, but rather was finally beginning to show signs of normalizing.

The Wall Street Journal has reported as early as May of 2021 that “The Mortgage Boom is Fading,” noting that “lenders are preparing for mortgage demand to cool in the coming months, the result of rising interest rates that make refinancing less attractive for a huge chunk of borrowers.”

None of this came as any surprise to the mortgage professionals who were paying attention to the MBA’s projections which as of late November showed refinance transactions for 2021 falling to $2.3 trillion from $2.6 trillion in 2020. But 2022 is expected to be far worse as the MBA is predicting that refinance transactions will fall to $860 billion.

The news is even more sobering when viewed from a total volume perspective. Total closed first residential mortgage loans will decline to $2.5 trillion in 2022 from $3.9 trillion in 2021, an almost 36% decline. Just as important, from a productivity and profitability standpoint, the purchase mix will rise to 67% next year from 43% this year. Not that we need the reminder, but purchase loans take more time and involve more documentation and are, therefore, more expensive to produce. 2022 marks yet another grand reset for the mortgage industry.

Now, as we round out the fourth quarter, it’s time for lenders to get serious about competing in a purchase heavy market. But to do that, they’re going to have to lead with something their prospective borrowers actually care about.

What applicants care about now

The applicants lenders are working with today bear little resemblance to those who financed homes even just 10 years ago. Today’s home buyers are better educated on the process, leverage technology to shop around and value transparency. Applicants today are more in the driver’s seat than ever before, they want to know that the lender they are working with is presenting them with the best possible offer.

That applicants are taking the driver’s seat is perhaps best evidenced by this stat from our Summer 2021 borrower survey: 61% that seek pre-approvals from two or more lenders and then close the loan with the one that convinces them during the process that they are offering the best deal. But how are applicants making that decision?

We wanted to find out, so this summer we fielded a projectable, nationwide survey of recent purchase and refi borrowers to better understand what they really expect out of prospective lenders.

What we learned will likely surprise many, not only for what it uncovered about the demands of the new generation of home buyers, but also for what these prospects perceive about credit scores and about the mortgage process. They project these perceptions onto the chances of being approved for their mortgage. These perceptions, however, are not entirely accurate.

What applicants really want from their lender

One of the primary objectives of our research effort was to better understand consumer experiences and preferences during the mortgage process. More specifically, we wanted to understand what they knew about their credit and their understanding of how it would impact the deal their lender offered them.

To our surprise, we learned that virtually all new homebuyers and mortgage refinancers already knew or had a good idea of their credit scores before starting the home buying or refinancing process. With banks and others making Vantage scores available to nearly everyone, consumers have much more access to their scores than ever before. And they are taking advantage of it.

The problem is, we found, that the scores people are tracking on a regular basis are not the same scores they are being evaluated on for a mortgage. Most credit score sites and banks that offer “score monitoring,” are using the Vantage score model. The mortgage lending industry, on the other hand, has standardized on a handful of FICO scores. As we spoke to mortgage lenders, we found that this often results in difficult conversations. Applicants come armed with their Vantage scores and are met with a score that is often different than what they expected. For some prospective homeowners, this means putting off a home loan purchase until they can improve their score.

This is important because, not surprisingly, having a high enough credit score to get the best interest rate and terms is the most important criteria for consumers when considering financing options. In a rising interest rate environment, this will become even more important.

Consider the example of two borrowers. The first has a mortgage credit score of 740. . Their APR is approximately 2.75% for a 30-year fixed rate loan. The other borrower has a credit score of 650. Their APR for the same loan is almost 3.50%.

The second borrower will pay approximately $36,000 more interest than the first over the life of the loan, with a monthly payment about $100 higher. Higher credit scores clearly matter. They have perhaps the largest impact on a borrower’s overall financial well-being and their long-term ability to grow their net worth. And applicants know this.

When a loan officer proactively addresses an applicant’s credit and offers to support them in achieving a more accurate score, they bring much needed transparency to the process and, in turn, builds much needed trust. The building of trust increases the likelihood that the applicant will close with them and dramatically increases customer satisfaction.

This is why we are seeing lenders entering the 2022 market determined to address the applicant’s credit first as a way to increase transparency, earn trust and close more deals.

This is just one of the key findings from our research. We’ve compiled other insights in a new lender that is now available for download on the CreditXpert website.

About the author

Michael Darne is Vice President of Marketing for CreditXpert, a company working to expand homeownership opportunities by making mortgage credit scores more transparent and by helping borrowers reach their true credit potential. He can be reached at mdarne@creditxpert.com.

# # #