There is no doubt that life in the mortgage world has changed pretty radically in the last 18 months or so, with many lenders unable to extend credit to anyone who represented even the smallest risk.
While this approach hasn’t shifted much, criteria has grown a little less stringent in the last few months.
With lenders enhanced willingness to lend, the question for mortgage brokers has to be what will put their clients in the strongest position to get an acceptance at the best possible rate.
And this needs to be taken in the context of the proposals outlined by the Financial Services Authority (FSA) last month (July 2010) to ensure all mortgages are carefully assessed to make sure borrowers can afford them.
Affordability a key focus
The FSA’s proposed changes aim to ensure all lenders get back to the basics of responsible lending. They focus on ‘affordability’ which has to be the right approach for any lending, but especially mortgage lending.
In particular, the FSA recommends imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay, as well as requiring verification of borrowers’ income to prevent exaggerated claims as well as mortgage fraud.
The FSA also wants to see lenders apply responsible lending policies that provide extra protection for vulnerable customers.
Responses to the FSA consultation can be submitted before the deadline of 16 November 2010. But in the meantime, what impact has this had on the mortgage application process?
Creating the right impression
A client’s credit history obviously plays a crucial part in the decisioning process. The credit record is not the only data used by lenders, but it is one area where brokers have the expertise to assist and advise their clients, so that the application process is as straightforward and stress-free as possible.
Historical data has long been regarded as vital to building an accurate credit score. But with many consumer behaviours changing as a result of the recession there has been a need for this to provide a wider and deeper picture of an individual’s financial history.
A bigger picture
For example, there have been a variety of new data sets added to credit files over the last few years – from telecommunications and utilities accounts data to current accounts and home credit payment information.
And whilst it can be argued that a default on one of these lower value credit accounts isn’t the same as a mortgage default, there is a view that these sorts of late payments actually provide early warning signs of longer-term financial difficulties.
Mortgage brokers are, therefore, well advised to find out the payment performance on all the financial accounts a client has, not just the bigger agreements such as a previous mortgage or car loan.
Indeed, if they actually suggest to their client to get their own copy of their credit file at the outset of the application process, then that will provide an excellent starting point for identifying the right sort of lender for their circumstances.
Credit file ‘hygiene factors’
It’s also worth thinking about the basic ‘hygiene factors’ of a credit file at the start of the application process, because often we find that it is something quite simple that results in a decline.
Is your client on the electoral roll at their current address? If they’re not, their application could fall at the first hurdle.
Are there shared financial commitments that might have a negative impact on their score? And if the client is no longer in that relationship , tell the client to consider paying off the commitment, then applying to the credit bureau to have the link removed.
And crucially, has the client been making multiple applications? Don’t forget that the logging of credit searches plays an important role in ensuring consumers do not become over-indebted or victims of fraud. Too many searches in a short space of time will ring alarm bells for a lender and may affect an individual’s credit score.
There is, however, clear recognition, especially in the mortgage market, that shopping around is a necessary process to find the best deal.
So, in order to ensure this doesn’t have an impact whilst searching for the best rate, make sure initial enquiries are treated as ‘quotation’ searches. These searches are not visible to other lenders making subsequent searches, just to the credit reference agencies and the individual. It’s only when a home buyer decides on the provider they want to go for and makes a formal credit application, that a ‘hard’ search is logged.
The best advice
There are signs that mortgage lending is starting to improve across all sectors of the UK marketplace, but there’s no doubt that there will be a much greater focus on lenders to extend credit responsibly.
Brokers can play their part in that focus by providing their client with the best possible advice on how their financial history – from the smallest credit agreement to the largest – might impact their credit score and, therefore, their application.
Neil Munroe is external affairs director at Equifax
