Analyzing a potential borrower’s financial background is a core function of the lending business, but that doesn’t mean it’s an exact science (or will be, any time soon). Standardized credit scores will always be the bedrock of your decision-making process — but they don’t tell the whole story.
To avoid unnecessarily risky loans, or to identify credit-worthy candidates among borrowers who don’t fit the traditional guidelines, you may need to find different ways to understand a borrower’s position.
1. Consider Your Borrower’s Network
You’ve probably heard someone quote John Donne’s famous line that “no man is an island.” That’s as true financially as it is socially, so it’s never a bad idea to ask a potential borrower about their extended network of family, friends, alumni contacts and business/personal mentors.
A youthful entrepreneur with minimal capital and minimal credit might seem like a poor risk, but if their family consists largely of other self-employed people or business owners with strong records of success, well … that paints a different picture. Affluent family members who might help with a payment in times of need, or influential relatives and mentors who can help them grow, are potential difference-makers.
2. Look at the Dynamic Between Couples
Back in 1996, Thomas Stanley and William Danko wrote a book called The Millionaire Next Door, which summarized 20 years of their research on the wealthy. One of the big points? Those who handle their money well have partners who are equally disciplined and frugal.
When you’re preparing your financial background check, probe both partners about their attitudes toward money and compare their credit histories both separately and together (if applicable). If both show evidence of a responsible approach to money, even in the absence of a conventional credit history or high income, that’s a positive.
On the other hand, if one partner’s history with money is more dubious, or if the “responsible” partner has shown signs of weakened responsibility since their relationship formed, that could be a warning sign.
3. Look Closely at That DTI
A high debt-to-income (DTI) ratio is unwelcomed in a potential borrower, and it’s often a warning sign. “Often” isn’t “always,” though, and looking at the number without its underlying context can lead to overlooking potentially valuable clients.
Younger borrowers, for example, often carry significant quantities of student debt. That represents a sort of mortgage in reverse: a down payment on future earning potential. As that potential comes to fruition over the coming years, your client’s DTI will fall into line. Newly minted doctors and lawyers are obvious examples, but plenty of less-obvious professions hold the promise of above-average incomes after a relatively short time frame.
If you’re not certain which occupations hold the most earning potential, the Bureau of Labor Statistics can provide much of that information.
4. Look Past the Paycheck
Life is more complicated than it used to be, in a lot of ways, and income is one of those ways. A lot of people now have one or more “side hustles” to complement their conventional wages or salaries, and in some cases, to replace it entirely.
That’s not necessarily an easy thing to quantify for the purposes of a loan, but it’s a reality of modern life. If you don’t find ways to document and account for those secondary income streams, you’re automatically missing out on a percentage of the potential borrowers you meet. Etsy stores, Uber rides, and eBay or Amazon merchant income may be harder to quantify than a standard weekly paycheck, but it’s all — eventually — money in the bank.
Even if no single gig accounts for a significant amount of money on its own, a willingness to do what’s necessary to pay the bills is generally a good sign.
5. Look for Signs of Good Money Handling
For clients with new or minimal credit, you may need to look at less-obvious signs of a sound attitude to money and good financial habits. These might include indicators like bills being paid consistently on time, a formal monthly budget or a demonstrated ability to save money from their income.
Those are all things that some people manage to do with low or uncertain incomes, but others struggle even if they have good incomes and solid cash flows. Those who handle their money well are generally better risks than those who don’t, even if their overall income or DTI seems inferior.
6. Are They Leaving Points on the Table?
If your gut tells you a borrower is a better risk than they appear to be on paper, a final important question is “Should their score be higher than it is?” For most of your clients, the answer will be yes, simply because people outside the lending industry seldom understand how to manage their finances for maximum impact on their credit scores. It’s especially important for borrowers whose scores are marginal or even sub-par.
Surprisingly, an unsatisfactory credit score can be tweaked in something close to “real-time” for lending purposes. Users of ScoreMaster averaged a 61-point leap in their credit scores in just 20 days, which can make a world of difference in the loan terms they’re offered.
ScoreMaster Makes a Difference
Introducing your clients to ScoreMaster is a solid win for you and them. The dashboard simply helps your clients tweak the timing and prioritization of their existing financial activities in a way that maximizes the impact of those activities on credit scoring. It also encourages them to follow the best practices of “fiscal fitness,” using the same psychologically proven techniques a smartwatch or fitness band employs to promote physical fitness.
ScoreMaster also makes you a collaborative partner in a borrower’s journey to achieve her best possible credit score, which builds trust and puts you at the very center of their better financial position. They’ll be grateful for it now, as they sign their mortgage, and even more grateful when renewal time rolls around.
Contact ScoreMaster today to learn more about how it can help you help your borrowers.
*Legal Disclaimer – ScoreMaster is a patent-pending educational feature simulating credit utilization’s effect on credit scores via payments or spending. Your results may vary and are not guaranteed.
Categorised in: Lending Tips
This post was written by David B. Coulter