Why Underwriters Need to Look Beyond the Credit Score When Assessing Borrowers
December 3, 2019
Borrowers that have set their eyes on a property need to meet certain criteria to be eligible for a mortgage loan. Underwriters look at a multitude of documentation and records that are both quantitative and qualitative to figure out just how well a borrower has been able to meet their financial responsibilities in the past to predict whether that trend will continue in the future. Underwriters now need to look at a host of factors beyond the credit score that tell a comprehensive story about the borrower that makes sense on paper. It is no longer enough to use an AU to compute the risk a borrower presents to a lender. AUs can be limited to merely crunching the numbers while manual underwriters look at the borrower’s entire profile more holistically, which is why manual underwriting needs to be incorporated into the entire process. Underwriters need to look beyond the credit score for several reasons. Let’s explore what these reasons are in more detail.
What Are Credit Scores?
A credit score is a statistical number that highlights the probability that a borrower will repay their debt and acts as the minimum requirement underwriters will consider before looking at a borrower’s application. Credit scores are based on credit history and help underwriters determine the borrower’s credit risk. A credit score can range from 300 to 850. The higher the score, the more likely they are to fulfill their financial credit repayment obligations. But it isn’t enough for underwriters to look at the credit score alone. This score will only shed light on the propensity of a borrower to deal effectively with their monthly credit payments and won’t show the entire picture that underwriters need to see like whether the borrower has a long employment history or has taken on too much debt in recent times.
‘Credit Hungry’ Behaviour
One reason why the credit score is not sufficient in evaluating a borrower’s ability to pay back a loan is that it doesn’t reflect how hungry a borrower is for credit. Credit hungry borrowers are typically the ones that apply for any credit card offer they see. Although some people exhibit this behaviour to exploit signup bonuses to wrack up frequent flyer miles, most individuals who are credit hungry apply for cards because their finances are a mess and they look to credit to stay afloat. Credit scores would not accurately reflect this behaviour because they only consider the credit history of a borrower and not how often they take on more debt.
Inadequate Income and Employment
Another reason why underwriters cannot rely on the credit score alone is because it only reflects a borrower’s past ability to pay off their debt. Lenders will need to look at their present and future ability to repay the loan before they issue any credit their way. One measure of a borrower’s ability to pay off the loan at present is their income level. Not only will they be asked to provide their annual income, but also the name of their employer. The lender will verify this data to ensure that they are unlikely to default on their mortgage loan because they have the desired income coming in to support that financial obligation. To gauge the borrower’s ability to paying off their debt in the future, lenders will look to their years of employment at their current job and the extent to which their employment promises job stability.
Size of the Down Payment
There is yet another reason why credit scores are insufficient in predicting whether a borrower will repay their mortgage or not. Credit scores do not take into account how much funds the borrower is willing to invest in their down payment. Underwriters place great emphasis on the capital that a borrower is willing to invest in the purchase of the home as it reflects how serious they are in keeping the home for the long run. The greater their investment in owning the property, the better their odds of securing a loan. Putting down a larger down payment for the home decreases the chances of a borrower defaulting on their loan, which eases most lenders’ apprehension in extending them the loan in the first place.
There are many reasons why underwriters cannot accurately gauge a borrower’s propensity to pay off a mortgage loan through the credit score alone. Some of these include the credit score not taking into account the size of the down payment that will be invested in the home, it not reflecting how credit hungry the borrower might be, and it not factoring in important variables like the stability of the borrower’s employment in the calculations that an AU might generate. Manual underwriting should be integrated with AUs simply because crunching the numbers alone is insufficient in painting a picture of the borrower’s history and financial tendencies. Underwriters need to conduct intense research to make sense of the story that the data collected reveals about a borrower and not rely on the credit score alone. If you are looking for a company that specializes in compiling and evaluating different borrower profiles for you to mitigate your credit risks, trust Expert Mortgage Assistance to deliver.