The home lending scene isn't what it was 20 years ago.
Although there are many similarities between then and now, mortgage professionals are discussing the merits of non-traditional credit references, alternative lending models and financial technology innovations – all of which may help you get a loan in the future. What could lead banks, credit unions and other financial institutions to reference alternative credit data in the mortgage application process?
"63% of people aged 18 to 29 do not have credit cards."
Millennials lack traditional credit histories
Generation Y has a reputation for being underbanked, which means they have short or sparse credit histories. Bankrate noted 63 percent of those aged 18 to 29 do not have credit cards. Fewer than one-quarter (23 percent) of millennials have one card, while a mere 6 percent own two credit cards.
Why would this be a problem? Underwriters (the folks who analyze your credit history, income and other such details) typically like to see a few lines of credit on your credit history. It shows that you've been able to handle more than a few debts over time, indicating that you'll be able to pay a mortgage. So, if you approach a lender for a home loan and you've only had one credit card, the underwriters may be apprehensive of approving you.
Millennials are generally underbanked, making little use of traditional banking resources. If you yourself are in this generation, you may feel the same way. A 2013 report from the Federal Deposit Insurance Corporation found 24.7 percent of people aged 25 to 34 years old were underbanked. In addition, 12.5 percent of people within that age bracket were unbanked, possessing no savings or checking accounts.
This poses a major challenge to mortgage lenders. It's common knowledge that millennials are the largest generation in the country, so what will happen to the housing industry if these individuals don't qualify for loans under traditional standards? It's a question that's brought up some interesting solutions.
— My PRBC (@MyPRBC) September 27, 2016
Why a focus on non traditional credit references?
Just because millennials and other individuals have thin-file or no-file credit reports doesn't mean they're financially responsible. Mortgage lenders are well aware of this, but lack the information necessary to assess underbanked persons' creditworthiness, which is why many financial professionals are considering the benefits of referencing alternative credit reports.
Alternative credit reports show how diligent people have been when paying rent and utility bills. They also display any liens, judgments, bankruptcies or other financial mishaps that have come up in an individual's past. Those advocating for non-traditional credit references argue that this information could help mortgage professionals approve applications.
In fact, Rep. Ed Royce, R-California and Rep. Terri Sewell, D-Alabama presented a bill that would allow Fannie Mae and Freddie Mac to use credit scoring models other than FICO, which is the most common report. The whole purpose of the bill is to enable the you to access mortgages without increasing risk to the lender.
Nothing's set in stone. Truthfully, it may take a while for mortgage lenders to integrate alternative credit reports into their underwriting process. However, with further development and better data quality, it's quite possible the industry may lean towards non-traditional resources.