Mortgages are often seen as commodities. To the untrained eye prices, features, and functions are relatively universal across most lenders. That’s not a condemnation; rather, it’s a function of the way the US mortgage market is structured and offered by most lenders. Consumers often do not see or understand the differences between loans or lenders, and simply choose the offer they believe comes with the best terms. In other words, the very definition of a commodity.
In a way, many lenders treat the borrower’s credit score as a commodity. It is simply a number received from the three credit bureaus that serves as an indicator of the borrower’s credit worthiness. Based on that number, the lender makes some big and often life-changing decisions for their clients.
And, because both the mortgage and the credit score are viewed as commodities, they are quickly forgotten once they have accomplished their purpose.
It doesn’t have to be this way. Both borrowers and lenders can benefit by looking at mortgages and credit scores as more than a commodity.
Start with the Credit Score
One way for the mortgage to transcend commodity status is to view the credit score as more than a one-dimensional indicator. A credit score is truly a starting point for engaging borrowers and educating them on how simple actions could materially improve their financing options. For most, their understanding of credit scores is along the lines of “pay your bills on time and your credit score will be fine.” But credit is far more nuanced than that. Available credit, authorized users, and the number of accounts are largely foreign concepts to most consumers. Small adjustments to how one manages their credit can have a major impact on their rates and terms. Being the one that steps in, digs into a borrower’s credit opportunity, and recommends the best loan product transforms you into a mortgage consultant.
Opportunities to Engage Across the Credit Spectrum
At CreditXpert we have been analyzing credit reports for more that 20 years. Over time we have analyzed hundreds of millions of credit reports. Through our analysis we know that two-thirds of borrowers with mortgage credit scores of 740 or below could increase their score by enough to improve the rate and/or the terms on their mortgage. For many, this could mean thousands saved over the life of a loan.
In 2020 alone, more than six million borrowers scored below a 740. That represents a little under half of all those who closed on a mortgage in the same year. Unfortunately, less than 10% of these borrowers had the opportunity to increase their score and reduce the cost of their loan.
There is another missed opportunity that does not show in these numbers: those prospective borrowers who did not even qualify because of their initial credit score. Our same analysis shows that two-thirds of these borrowers also had the chance to increase their credit score and qualify for a mortgage. They simply were not given the opportunity – and 100% of these borrowers probably did not get a mortgage. As big as the mortgage pool was last year, it could have been larger!
We also believe there is room to improve rates and/or terms for those with credit scores that are above 740. Over the past several months we have talked to lenders that specialize in jumbo loans that see opportunity to work with their clients to fine tune the loan instrument. For these lenders, the opportunity here is to enter a more consultative relationship with their clients [This sentence and the closing here needs more work].
Differentiate Yourself in a Competitive Market
With a rising interest rate environment and tight housing supply, we see an even greater opportunity to differentiate yourself. This missed opportunity continues into 2021. We estimate that four-and-a-half million borrowers will be in the same situation this year. They, too, will pay too much for their mortgage, or not get one at all.
As we enter a more competitive market, finding ways to differentiate yourself will help improve your close rate and grow your pipeline.
“Be Curious, Not Judgmental”
I wish I could take credit for that quote, but it came from poet Walt Whitman. Many of those who have pushed society forward (Albert Einstein, Walt Disney and Steve Jobs) often spoke of the importance of being curious. When you are curious, you learn, gain new skills, and have an opportunity to advance the ball in some meaningful way. In the case of Walt Disney, his curiosity led to a global revolution in storytelling and entertainment. As a mortgage executive, your curiosity could lead to someone being the first in their family to own a home.
Credit scores are a curious thing. Just a number, but more than that, they are often taken at face value. Those applicants who qualify based on their credit score, as presented, move through the mortgage process to become full-fledged borrowers, and at the closing table, homeowners. Those who do not qualify often drop from the pipeline without enough information on how they might change their circumstances.
This is why it is important to dig deeper with two simple questions . . .
What could my borrower’s credit score BE?
What simple actions can my borrower take to improve their score enough to qualify or to improve the rate and/or terms on their loan?
While these are easy questions to ask, they are also easy to answer using technology every lender has at their fingertips. If you look at credit reports with any regularity, chances are you have seen this technology. There is often a link next to a credit score with an indicator of what the credit score could be after taking a few simple actions. Clicking the link reveals how to make the improvement happen.
Creating Moments That Matter
Working primarily in business-to-consumer industries has taught me a lot about what drives buying behavior and how to develop lasting customer loyalty. It is the little moments that can make a HUGE difference in a purchase decision and long-term loyalty. Digging deeper into every borrower’s credit score creates ‘moments that matter’ that will not only help ensure that a borrower closes with you this time but greatly increases the likelihood they will return to you again and again.
Consultative mortgage executives should look to understand credit score drivers. Scores change constantly and may be negatively impacted by simple things like the timing of payments or the number of authorized users on an account, or simply the account balance. Taking the time to understand an applicant’s situation by asking the two questions could deliver positive returns for both the lender and the consumer.
Taking the time to understand credit score drivers yields at least three ‘moments that matter’ that will pay big dividends:
Show borrowers what their credit score could be. As I pointed out above, fewer than 20 % of borrowers had the benefit of this conversation in 2020. Opening the conversation starts the savvy mortgage executive down the path to becoming a trusted mortgage consultant. This simple act of transparency shows the borrower that you are doing everything you can to find the best rates and terms.
Educate borrowers on how to improve their credit scores. Very few graduate from college or enter adulthood with a firm grasp on how to manage their credit like a pro. The credit score improvement plan that is just behind the link on most credit reports is the basis for this important conversation. It illustrates, for the borrower, the often simple, smart actions they can take to improve their score. Imagine the loyalty you could engender by being the first person to help educate a client on how to better manage their credit.
Check in on progress. For those that come to you early in their home search, finding meaningful reasons to follow-up can be challenging. Inquiring about the progress your borrower is making on their credit score improvement plan is clearly one of those moments. Doing so gives mortgage consultants a better understanding of the borrower’s timing and when they will be ready to close. It also helps ensure they are credit- and loan-ready when they finally find the home of their dreams.
Borrowers have plenty of mortgage options, and they are being solicited constantly throughout the mortgage process. By focusing on the above three ‘mortgage moments’ you will not only get more of your existing borrowers to the table but grow your pipeline as word gets out that you are focused on helping clients secure the best rates and terms.
Mortgage moments, by the way, do not stop at the closing table. I will be sharing ideas on how to keep creating them long after the ink is dry on those closing documents in a future article. In the meantime, if you’re interested in creating ‘mortgage moments’ drop me an email at email@example.com.
Mike Darne is VP of Marketing at CreditXpert. Mike joined CreditXpert in early 2021 with over 20 years of brand and marketing leadership experience at companies like Marriott, Capital One and Sallie Mae. He also spent several years leading growth marketing for early and late-stage tech companies. Mike is excited about the impact that credit transparency will have on millions of existing and prospective homeowners.