Exec Summary & Introduction
Profitably connecting borrowers and lenders is the name of the mortgage game. Sounds simple though it is one of the most difficult aspects of mortgage lending. This is not a new challenge.
CreditXpert believes that one of the keys to more profitable lending is focusing on early leads and reducing early lead fall-out. Our tools and technologies give lenders and borrowers deep insight into credit scores and how to maximize them.
Early lead fall-out is a typical, perennial problem for mortgage lenders. To be clear, early lead fall-out affects those potential borrowers who do not, for a myriad of reasons, complete their application. These early leads fall out at a rate of as much as 20%. Leads cost money. Lost leads cost even more.
According to HMDA data, credit history is a top reason for mortgage loan denials. Of course, this does not even include applicants who never get to the application phase due to credit issues. So, it follows that one way to reduce early lead fall-out is to pay very close attention to credit scores.
For over twenty years CreditXpert has been developing tools and technologies that make credit scores, and their potential, transparent to both lenders and borrowers. One important thing we’ve seen over the past two decades is that a credit score represents just a moment in time and can shift significantly with small changes. Put another way, a credit score is just a snapshot; by itself, it does not define an applicant’s ability to repay a loan over time.
That’s why loan originators need tools that give dimension to the credit score. Our most widely used product, CreditXpert® Credit Assure™, is available through all credit report providers. Appearing on 65 million credit reports in 2020, it shows what a borrower’s credit score could be, what we call the borrower’s potential score. Our Wayfinder™ product, shows lenders and borrowers the precise steps necessary to achieve that potential score. For some borrowers, taking these steps means loan approval when approval was otherwise not possible. For other borrowers, the steps they take lead them to a better, more affordable financing deal. Either way, the borrower is more likely to attain the dream of home ownership, and the lender is more competitive and closes more loans.
Of course, tools like these are just one step in the process of maximizing pipelines and reducing early lead fall-out. Here is a six-point plan for reducing early lead fall-out, perhaps by as much as 50%:
1) Validate and analyze early lead fall-out. Thoroughly review 2019 pipeline statistics and performance. Look at 2020’s data as well. While last year is not representative of the years ahead, it will provide key insights.
Why don’t more leads convert to applicants, and, then convert to closed loans? That data should be readily available through your POS and loan origination systems. These systems should be showing you where potential borrowers either dropped off or were left behind. I also recommend asking your loan originators. While there will be some common patterns, like getting stuck at choosing a loan program or credit, every lender is different. It is important to look at this data critically. Knowing what drives early lead fall-out is key to decreasing this costly drag on profitability.
One of the most critical areas for review is your borrower’s credit score. We know credit is the number one reason for loan denial. A very close look at their score, especially in the following five credit score categories, will provide untold insight into your early lead fall-out. The five credit score categories, along with the reasons they are important, include:
Credit Score Categories
|Credit Score Categories||Why This Credit Score Category Matters|
|520 - 579||Many lenders have a minimum credit score above FHA’s minimum requirement of 500, even with 10% down. CreditXpert’s software can help applicants meet those requirements. And when borrowers reach a 580 score, their required down payment drops from 10% to 3.50%.|
|580 - 619||620 has traditionally been the minimum score qualification for conventional or VA loans. Even if the score requirements change, often there are relatively easy things that a borrower can do to quickly hit the target mid-score.|
|620 - 639||620 is also generally the minimum score qualification for conventional loans that can be purchased by Fannie Mae or Freddie Mac, and for VA loans.|
|640 - 719||At 640 and above, borrowers typically qualify for better interest rates and lower PMI – and that keeps improving at each 20-point score increment. Your competitors may be able to lure them away with better terms.|
|720+||Even applicants with excellent credit scores may not qualify for your best mortgage loan rates until they reach scores of 740, 760, or higher – so they may be lured away by competitors offering better rates. These are desirable borrowers and often require only a few credit actions to reach the target mid-score. Don’t lose your hard-earned quality leads to competitors.|
The credit score categories are important for several reasons, both because they inform the mortgage products you can offer and because the borrowers within each credit score category must generally take different actions to achieve a higher potential score. Simply said, borrowers are not monolithic; they all need different forms of help.
There are actions every borrower can take regardless of the credit score category into which they fall. These actions will improve their mid-score to secure a mortgage. In fact, the top three actions our lenders simulate to try to help customers include:
1) Pay down existing credit account balances,
2) Look to the future, and
3) Delete existing credit or collection accounts.
Note: We will expand on these five credit score categories, why they are important, and how to help borrowers in each of them in a future “Xpert Point of View” in this series.
2) Develop plans to improve on the top reasons for early lead fall-out. No single approach will address all the reasons potential borrowers walk away, nor will one plan fit every lender. Understand why you lose leads – and what you can do about it. For instance, if you are losing leads because they go to a competitor offering better terms, look at ways to get good prospects into more competitive loan programs. If a majority of your leads do not qualify, you may need to help them understand qualification issues, setting them up for success.
You may even want to consider a dual approach to pipeline management. The five credit score categories discussed above make it clear not all borrowers are the same or require the same level of assistance to go from lead to loan. Yet one pipeline for all leads and borrowers is a traditional mortgage lending approach.
Different borrowers in different credit score categories suggest that two pipelines instead of one may be the better approach. The first pipeline is what I call the ‘at-bat’ pipeline. These are the borrowers who will close within 60 days. Improvements in their credit are likely simple and quick, with almost immediate effect. The second pipeline is the ‘on-deck circle’. On-deck borrowers are those that require more assistance, and, as a result, will take longer to close. This approach operationalizes our motto, “Never Waste a Lead”. We will expand on this topic as well in an upcoming Point of View.
3) Execute. Parts of the plan will be fast and easy to execute. It may be as simple as making sure your loan officers are aware of all the options they have at their disposal. Others may be more time-consuming. In some situations, avoiding early lead fall-out requires borrowers and lenders to work together over a longer timeframe. Actively nurturing borrowers builds deeper relationships and gets more borrowers to the closing table. As we shift back to a more normal market volume, no lender can afford to lose these leads.
4) Commit the resources to help borrowers. More and more, data-driven nurturing is becoming standard practice when credit is an issue, whether the credit issue is keeping the borrower from qualifying for a mortgage or severely limiting their financing options. Some lenders will offer their advice, while others may suggest credit counseling or credit repair. This may mean letting the lead go, in the hope the borrower will return once their credit has improved. As a salesperson, I can tell you this goes against a best practice I learned a long, long time ago: Never let a lead go. And, as someone trying to make a difference for borrowers, I want to give them a better approach, one that educates them and helps them make a long-lasting change.
5) Make a commitment to borrower education. Specifically, commit to educating borrowers about their credit scores, and what impacts them. Even borrowers who know their mortgage credit score often have no idea why it is what it is. They take the score at face value, assuming nothing can be done about it. And therein lies the trouble with credit scores: they are opaque.
Credit scores do not have to be opaque. Nor should they be. Every borrower deserves to understand what is behind it, and what they can do to make and keep it better. Credit scores are often adversely impacted by errors that are no fault of the borrower. Without help and investigation many borrowers would not know this. This is where you come in. This is also where we come in. My company, CreditXpert, offers the tools you need to cast a bright light on what comprises every borrower’s credit score. More importantly, the same tools show you what the credit score can be, and how to get it there. Whether you review the credit report to show your borrower what impacts their score most, or run credit score simulations for them, you have the power to show every borrower – not just those who are credit-challenged – how a few simple actions can make a big difference.
There is a compliance aspect to this, too. Treating all borrowers the same, helping all borrowers equally, aids regulatory compliance.
Sounds like work, expensive work, I hear you saying. True. But every closed loan is worth thousands of dollars – and lost leads mean lost profit. Do not throw out dollars chasing dimes.
6) Diligently monitor your early lead fall-out plan and performance. Earlier, I suggested that you may be losing 20% of your leads to early fall-out. Set a goal for 2021 to cut it by at least one-third.
There is a great deal of technology available in the mortgage industry. But few of these technologies are simple to implement, easy-to-use, and produce a positive ROI with the first closed loan. CreditXpert’s products – Credit Assure, Wayfinder and What-If Simulator™ – are three of those very few all-around easy-to-use and affordable technologies available today.
The following is a quick example of the positive impact focusing on early lead fall-out with the help of CreditXpert can have on net income:
Impact of Reducing Early Lead Fall-out by 33%
|Status Quo||Reduce Early Lead Fall-Out by 33%|
|Early Lead Fall-Out||20||13|
|Loans Closed (see notes)||56*||63**|
|Net Income Per Loan||$5,000||$4,985|
|Net Income on Closed Loans||$280,000||$314,055|
Increase in Net Income with 33% Reduction
in Early Lead Fall-Out
*Assume 70% Pull-Through
**Assume 72% Pull-Through
Total net income increases even though per loan income decreases slightly to reflect the cost of focusing on early lead fall-out. Overall net income increases by $34,055 in this example.
Profit is good, and increasing profits is even better. Developing lasting relationships with borrowers that turn into repeat and referral business is also important, especially with the market’s transition away from refinance to purchase lending. Borrowers who receive regular, meaningful follow-up follow-through to the closing table and beyond.
Addressing early lead fall-out by focusing on borrowers and their credit delivers substantial returns. Fall-out, whether early on or at any point in the pipeline is costly in dollar terms as well as in lost future opportunities.
Both the Wayfinder and What-If Simulator tools address early lead fall-out, as well as fall-out throughout the loan origination cycle. Easy to implement and cost-effective, their simplicity of use belies the true power in our solutions. Every member of your team, once they begin using CreditXpert tools, quickly becomes a credit expert themselves. No guesswork, just quick, accurate, actionable analytics that make an impactful difference for you and your borrowers.
Let’s have a deep and detailed conversation about credit: its dimensionality, making it transparent and helping you and your borrowers maximize their credit potential. The ideas presented here are just the tip of the iceberg. We have plenty more to share! Send me an email at email@example.com. Let’s talk.