Lenders love a good lead-generation program. Advertising, direct mail, online banner ads—they all serve to bring business in the door. But what happens when your new applicant gets declined for the mortgage loan they want? Or you realize they probably won't get approved even before they fill out an application? Is that money spent getting them to contact you wasted? Do you send them packing? Don't!
There is a whole new line of thinking about loan origination that's paying off for mortgage professionals across the country. It involves hanging onto those leads that didn't quite measure up and steering them toward a program that will help them learn how to better manage their credit so they can, ultimately, become homeowners. The new philosophy involves an emphasis on credit education: Teach people how to make good financial decisions and show them how their decisions impact their credit score, qualification, and interest rate. The goal is to improve consumer knowledge so that once the consumer qualifies for a mortgage loan, s/he doesn't return to the behavior that so negatively affected their ability to get credit. Consumers who are able to maintain a more creditworthy lifestyle are also more likely to be able to follow through on their dreams when they want to move up to the next house.
Hopeful Homebuyers Fear Rejection
Fear of rejection because of a less-than-stellar credit history is preventing many potential homebuyers from getting into the market. A recent national consumer survey conducted by loanDepot, an independent mortgage lender, showed that 46 percent of today's potential homebuyers are afraid they won't qualify for a mortgage. Many overestimate the influence of their debt when compared to their income. Unfortunately, most of them are drawing these conclusions based on assumptions: just 27 percent of that group took steps to see if they would qualify for a mortgage, while the other 73 percent simply put their homeownership dreams on hold.
The survey also revealed that most Americans don't understand credit scores, especially respondents who hoped to buy a home in the next two years. Half didn't know the minimum score they needed to qualify, while 18 percent thought they needed a score of 680 to 770+ to get a mortgage loan, even though some major lenders are currently approving FHA loans for borrowers with credit scores as low as 600.
To confuse the issue even further, a report from the Federal Reserve of New York that compared mortgage applications from May 2013 to February 2014 showed that applicants with scores under 680 were rejected at about six times the rate of those with scores over 760. With all the confusion and uncertainty about what is required to qualify for a loan, what's a consumer to do?
Education Helps Consumers Qualify
Many of the people who are shying away from homeownership are first-time homebuyers, often younger adults who haven't been working long enough to build the financial foundation that new regulations require. According to the loanDepot study, the market share of first-time buyers has declined from 54 percent of all sales in March 2009 to 28 percent in February 2014.
Knowledge may help to ease their fears. Once potential homebuyers understand what is involved in creating a credit score and how different actions affect both their score and their ability to qualify for credit, they are in a better position to begin to make smart decisions that may improve their creditworthiness.