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Credit history lessons

Underwriting versus credit scoring – does it matter? At first glance, one might be inclined to say, who cares?

As long as the outcome is the same and an intermediary secures a mortgage offer for their client, does it really matter what process the lender goes through to produce the offer?

Unfortunately, the difference in outcome between the two can be quite significant and the wrong outcome can be embarrassing for the introducer as well as the client.

Try telling a client who has been waiting for a mortgage offer from their chosen lender, often for a week or so, that they have been rejected.

Then, as if to throw fuel on the fire, you have to tell them that that there is no explanation for this other than the lender&#39s computer has rejec-ted them and there is no one you can talk to about it.

This can leave egg on the face of the intermediary or mortgage broker, not to mention the time and cost involved, as they scramble to replace their original recommendation with a new lender, which might also reject the application due to its creditscoring system.

As well as leaving a frustrated applicant with a house purchase looming and vendors and estate agents to keep happy, they do not understand the process that the lender uses to reach its decision.

It also instils an uncertainty in the mind of the prospective borrower about their personal credit history. It is hardly surprising that the housebuying process can be one of the most stressful events in your life.

What is credit scoring?

In a nutshell, it is a point-scoring system which lenders can adjust to eliminate or accept certain types of borrower from a particular demographic group or with a set of personal and/or financial circ-umstances which fall into the high-risk category.

The score is based on the aggregation of information taken both from credit reference agencies and the application form.

For example, first-time buyers or borrowers who have made late payments on a loan might be declined because of this fact combined with other “non-strengths”.

The number of factors that the credit score relies upon can be bewildering. These can include the area in which the client lives, the type of bank account he holds or the number of times that he has moved house in the last three years.

The relative weighting of the factors that make up the credit score (and, in many cases, the factors themselves) is kept totally secret to avoid corruption, so even the employees of the lender cannot tell an applicant why his mortgage has been declined.

The process is automated and offers the lender the benefit of speed and efficiency, not to mention the obvious cost savings in terms of staff and processing efficiency. Unfortunately, it relies upon a computer to make decisions and, as we know, there is no “maybe” with computers, only a “yes” or “no”. For the vast majority of us, it means little but it is the unfortunate people who fail to get a loan that will feel the most aggrieved.

Why choose underwriting?

With personalised underwriting, an underwriter will assess every individual&#39s mortgage application on its own merits. It is also possible to look beyond the first impression of the applicant and gain an understanding of their ability and intent to repay the loan, which after all is the most important thing.

In certain sectors of the mortgage market, credit scoring would be even more of an obstacle.

For example, imagine a borrower who had problems with their credit history in the past, possibly through no fault of their own, such as redundancy, divorce or longterm illness. A traditional lender&#39s credit score would almost immediately reject them.

The whole principle of lending to these customers depends upon the lender&#39s ability to consider the current situation by reviewing the past and present and predicting the future.

Unfortunately, in addition, the introduction of credit scoring into some traditional lenders has lead to the de-skill- ing of the workforce, which can no longer use underwriting skills to assess a case.

Look to the future

Credit-scoring systems, by their very nature, rely upon historic statistical information and therefore have to look at an applicant&#39s past history to make a decision.

This does not mean that an underwriter ignores all that has gone on in the applicant&#39s financial past. These factors are still taken into account but they only form part of the decisionmaking process.

If it is clear from a client&#39s application that they have been through a life-changing event such as those mentioned above, then it is quite possible they will return to their normal “financial path” and become good and fully performing borrowers.

Without lenders which adopt this attitude, borrowers with blemished financial pasts but bright financial futures would never be given the chance to repair their credit and return to being traditional borrowers.

For the majority of borrowers, the fast and efficient service offered by the bigger mainstream lenders with credit scoring is more than accep-table but let us not forget the one in four borrowers who still need the consideration of an underwriter.

You never know when you might be one of them.

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