Borrowers With No Credit History: What’s the Risk?
Even in the aftermath of the lending crisis and housing market collapse, purchasing a home can be a more financially sound decision than renting for many prospective buyers. As demand for rental properties increases, so does the average price of a monthly rental. In many parts of the country, mortgage payments can still be cheaper than rent.
This trend is driving many first-time buyers to consider making a home purchase. A growing portion of that demographic, however, has to overcome the hurdle of little to no credit history before they can secure a mortgage. Originating a mortgage for such buyers can be challenging. In addition to the struggle to underwrite a mortgage for a borrower with limited or no credit, there’s also the inherent risk of lending to consider.
Using alternative data to accurately evaluate risk
When a client has limited credit to evaluate, there are still ways to assess your risk. In the absence of credit history information from the three primary reporting agencies, you’ll have to look at alternate data, such as that which Equifax Analytical Services provides. Important information is available in payment and account histories, including everything from rent and utility bills to cellphone contracts.
A prospective client may have established a strong history of maintaining personal finances despite having no existing lines of credit. In fact, the Equal Credit Opportunity Act entitles such consumers to present any and all of their alternative credit accounts for consideration. There are many Americans who have established financial stability and good money management skills, they’ve just done so outside of the traditional credit mainstream. Opening the door to these clients can bolster the market and help everyone involved reach a desired end.
Mortgage fraud and no-credit buyers
While someone may have no credit history for a variety of reasons, one of the most common is youth and inexperience. Young people seeking to take advantage of low prices and low interest rates are flocking to lenders in hopes of walking away with keys to their own homes. What many of them don’t realize is that even a slight exaggeration of assets or capital can constitute mortgage fraud. It does pay for the lending professional working with a no-credit buyer to stress the importance of an honest and full disclosure. Though working with these clients can present an initial challenge, taking advantage of alternative credit while ensuring legal compliance can smooth the process considerably.
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