PERSON OF THE WEEK: As home prices continue to rise, Americans are sitting on growing reserves of untapped home equity that they can use for home improvements and a wide variety of other purposes. Mortgage lenders that offer HELOCs can still capitalize on the opportunity – as long as they pay attention to the trends – including the growing use of alternative credit data and automated borrower verification in origination.
To learn more, MortgageOrb recently interviewed JT Edelen, sales director, mortgage verification services, Equifax Workforce Solutions.
Q: As the mortgage industry evolves, so do the trends for Home Equity Lines of Credit (HELOCs). What trends are you seeing in this space? More importantly, how can leveraging alternative data assist both lenders and borrowers?
Edelen: Historically, HELOCs have been popular options for homeowners to access funds using their home as collateral. Some of the most recent developments in the mortgage industry that have led to an upward trend in HELOCs include the widespread adoption of automation – spurring further flexibility and customization within HELOC products and offerings – and rising interest rates.
For these reasons, among others, there has been a noticeable jump in subprime HELOCs – specifically, a 65.8% increase when compared to the same period in 2022. Consumers with a VantageScore 3.0 credit score below 620 are generally considered subprime accounts, with Equifax data indicating that more than 3,610 HELOCs have been issued year-to-date to subprime consumers. These newly purveyed HELOCs have a corresponding total credit limit of $225.9 million, a 40.0% increase over the same period a year ago.
With more than 77 million consumers possessing thin credit files or deemed as “credit invisible,” pairing automated tools with alternative data, like instant verifications, can provide lenders with a more complete view of a borrower’s financial profile, ultimately allowing for more informed lending decisions.
Because many of these thin credit files or “invisibles” may be gainfully employed and have the income level that otherwise makes them well-qualified loan applicants, alternative data helps expand access to credit amongst borrowers with limited or no credit history by allowing lenders to assess creditworthiness based on alternative indicators. This automated analysis of alternative data sources can lead to faster insights, quicker loan processing and underwriting, and streamlined access to funds for borrowers.
Q: Lenders have many options when it comes to the verification of income and employment during mortgage origination. Why is it important for a lender to see a borrower’s gross income and not just their net income from these verifications?
Edelen: Assessing gross income provides a more stable and consistent measure of a borrower’s income over time. In contrast, net income can fluctuate due to changes in tax laws, personal circumstances, or employment benefits and only partially depicts one’s finances. Rather than solely considering net income during mortgage origination, gross income can offer a standardized benchmark that is less susceptible to variations and can better reflect a borrower’s long-term income potential.
With insight into a borrower’s gross income, lenders can develop a deeper understanding of an individual’s financial situation to offer better suited loan terms. Additionally, assessing gross income helps lenders ensure borrowers do not qualify for more or less than they can truly borrow, while helping to mitigate risk.
While gross income is essential in assessing a borrower’s financial situation, lenders may also consider other factors, such as employment history, stability, and other sources of income, during the underwriting process. This holistic approach helps lenders evaluate the borrower’s overall financial strength and make more informed lending decisions.
Q: We like to consider millennials in terms of the cohort purchasing homes, but many have already bought their first homes. Gen-Z is the future of home buyers (and, in some cases, current). So how can lenders today begin preparing for this new and unique group of borrowers?
Edelen: Nearly one-third of the oldest Gen-Z’s, or 30% of 25-year-olds, owned their home in 2022, demonstrating this generation’s buying power and desire for homeownership. However, for these Gen-Z consumers, it’s not just about access; it’s about providing access to the best mortgage terms that fit within a consumer’s specific lifestyle and budget.
Alternative data presents a broader perspective of a borrower’s profile with greater reliability and offers to enhance decision-making while helping to mitigate risk, regardless of the economic environment, credit bands, or credit profiles. Expanding the lens on what factors determine creditworthiness can increase lending opportunities and heighten overall fiscal focus.
Traditionally, when applying for loans and credit, borrowers are often tasked with providing additional documentation, such as W-2s, pay stubs, or proof of residency. Requiring applicants to provide these documents, not to mention the time it takes lenders to track down the paperwork, further amplifies consumer friction through cumbersome, time-consuming processes.
Rather than losing Gen-Z borrowers to long, drawn-out and outdated lending practices, lenders must realize that these consumers are accustomed to receiving immediate assistance through a seamless experience to get exactly what they want – or they will take their business elsewhere. Automated alternative data can help lenders provide the experience that consumers have come to expect.