Most lenders use homeowner credit profiles in their approval process. Understanding these profiles will help you offer the best customer financing options.
If you’ve applied for financing before, you know the importance of a credit score. Even though it doesn’t show the whole picture of your financial history, it can play a large role in a lender’s decision. This is true for your homeowners as well.
As a contractor, it’s important to understand homeowner credit profiles before offering financing to your homeowners. This will help you answer potential questions and find options that work for a range of financial situations.
WHAT MAKES A CREDIT SCORE
Credit scores are a fairly recent development in the financial industry; the first generalized FICO score only came out in 1989. Before then, credit profiles were physical files, not digital, and took arbitrary factors such as gender and race into account.
Today, credit scores are more objective and only consider financial history. Lenders use these scores to decide if they will offer financing and which rate they’ll offer. But what exactly goes into this score? It depends. There are two main credit score models: FICO and VantageScore. They evaluate items on your credit report differently, so your credit score will vary depending on which model a lender uses.
Ninety percent of lenders use FICO scores, so that’s what we’ll explore here. Erin Fuchs, our Vice President of Operations, gave us some insight into the five factors that make up this score.
Payment history takes up the biggest chunk, accounting for 35% of a total FICO score. Using credit and making payments on time increases the score. But let’s say your homeowner was 30 days late on a bill recently — their score could decrease by 100-150 points.
Credit balances make up the next 30% of a FICO score. Low credit balances lead to a higher score, so Erin recommends only using 30% of available credit. For example, your homeowner may have a $10,000 credit limit, but they only use $3,000. This shows that they can spend more but don’t, which positively affects their credit score. But if they use more credit (say, $7,000 out of $10,000), it could lower their score by 50-75 points.
Length of credit history (15%), the newness of credit accounts (10%), and credit account mix (10%) make up the rest of a FICO score. A long credit history shows an applicant is reliable, whereas new accounts can indicate financial hardship or just inexperience with credit. And having multiple types of credit (such as installment loans, credit cards, and mortgages) shows an applicant can manage different credit types.
NEAR PRIME AND SUBPRIME LENDING
All five of the above factors combine to make your credit score, which gives lenders a quick picture of your financial history. The Consumer Financial Protection Bureau breaks credit scores into five levels:
- Super prime (720 to 850)
- Prime (660 to 719)
- Near prime (620 to 659)
- Subprime (580 to 619)
- Deep subprime (300 to 579)
Some lenders will only accept scores in the prime or super-prime credit ranges to avoid taking on too much risk. But consider this: 46% of American adults have a near prime credit score or lower, and 40% of millennials have a subprime credit score. Millennials are homeowners now, and if your financing partner doesn’t offer options for those customers, you could lose out on projects. So, you may need to partner with additional financing companies to ensure you have options for everyone.
When you’re choosing a customer financing partner, consider one that offers waterfall lending. With this lending structure, your customer will apply for financing at one company. If that company cannot approve a loan, they will refer the application to another lender. This way, if your customer has a near prime credit score or subprime credit score, they still have financing options.
Waterfall lending can speed up the application process, too. Your customer only has to fill out one application, and the financing company handles the rest. You’ll get more approvals, too, since your financing partners consider four of the five credit levels.
LOOKING PAST THE CREDIT SCORE
Even though credit scores play a large part in a lender’s approval process, they’re only the beginning of credit profiles. Imagine the credit score is a summary, and the credit profile is the entire book. You don’t get the whole story when you just read the summary.
As we come out of the pandemic, the credit landscape is changing. Credit scores are decreasing across the board. For the first time in a decade, the average credit score in America hasn’t increased. In fact, 20% of FICO scores decreased by at least 20 points from 2021 to 2022. And with high inflation rates, 66% of Americans don’t think their finances will improve in 2023.
Even if you’re financially stable, dropping from a prime credit score to a near prime credit score is easy. Say, for example, you open a zero-interest credit card to finance furniture. You could pay it all now, but you’d prefer smaller payments. Your credit score will drop 10 points for the hard credit pull, then another 25 to 50 points for having a new account. That’s a total loss of 35 to 60 credit points just from opening one credit card. And that doesn’t account for how much credit you’ve used, which could lower your credit score even more.
So, even though you’re financially stable, you could still be declined for a loan based on your credit score. That’s why, at FTL Finance, we look at a homeowner’s entire credit profile before deciding to approve or deny a loan application.
Looking at the whole story lets us approve more applications for homeowners with near prime and subprime credit scores. We offer competitive interest rates to homeowners approved for our risk-based lending program. And if we can’t approve a loan, we’ll refer eligible applications to one of our financing partners. This way, more homeowners get approved for financing, and you get more business. Check out our approval programs to learn more.