While you may have a good understanding of consumer credit, you may not know why mortgage lenders look at credit scores and histories differently. In addition to putting less importance on our applicants’ FICO score, their decision-making and employment history are what we review first. Here’s why.
“Consumer behavior is more important than credit scores.”
When others hear me say this, I often see a few raised eyebrows. This is understandable, since many of Results Mortgage’s loan programs state a minimum FICO score.
A FICO score is based on five factors:
- a consumer’s payment history
- amounts owed
- length of credit history
- new credit
- credit mix
Some prospective homebuyers order a FICO report online that includes their credit score, as they think this will tell them if they’ll qualify for a mortgage. But this isn’t 100% true for two reasons:
- Mortgage lenders are provided with a different FICO product than the consumer version.
- Consumers often don’t realize that a responsible mortgage lender will look at more than an applicant’s credit score.
Here are some things that concern me when I am taking my first look at a new mortgage loan application.
1. High debt-to-income ratios (DTIs)
The reason I review this first is simple – It tells me more about a consumer’s ability to repay a mortgage than anything else. Experience has taught me that prospects with a DTI over 50% often present the highest risk. They may be able to make their repayments for months or even years, but many will be in big trouble the first time they encounter a major, unseen expense. This is why the FICO algorithm bases 30% of a consumer score on debt levels. Many loan applicants with high DTIs share another big red flag in their credit reports, which my second biggest concern.
2. Multiple recent credit applications
While this won’t always result in a rejection – for example, some consumers have paid off credit card debt quickly by switching to cards that offer zero-APR balance transfers – multiple credit card applications are usually a sign of poor money management. It’s also FICO’s biggest concern, as 35% of a score is based on credit management skills.
These are often the same consumers who are offered one-time discounts at an online store or retail chain if they accept a pre-approved credit card, and find too many of these offers irresistible. Since these cards are often approved for people with sub-prime credit scores, they often come with scary-high APRs.
When a Results Mortgage underwriter first sees a mortgage loan application with a high number of credit card accounts, they will have concerns. They will wonder, “If this prospect can’t stop buying clothes, furniture, and gaming equipment, how will they manage a mortgage payment?” It’s a valid question, and something to mention to prospective buyers who ask you questions about credit. It will help you determine who’s ready for homeownership, and who isn’t.
3. Frequent job changes
While this year’s pandemic has removed some of the stigma from this, applicants with a long history of “job hops” may not qualify for some mortgages. In addition to lack of stability, determining these applicants’ DTI can be tricky, since it will probably change at the same time the applicant changes jobs.
Frequent job changers often have the following problem as well.
4. Little or no cash savings
While a lack of savings is often understandable – especially for first-time buyers and applicants paying off student loans – it limits the number of loan programs we can offer your buyers. In addition, being cash-poor also makes it difficult for new homeowners to be prepared for unseen future expenses.
However, lack of savings is not always a deal-killer. Many Minnesota rental prices are literally higher than potential mortgage payments – a 2019 survey found that St Paul homeowners were, on average, making mortgage payments that were $226 lower than monthly rent prices*. In addition, many of these prospects may qualify for one of our state’s low down payment, or no down payment programs.