Lenders divide their clientele into tow categories: those that qualify for so-called “prime” mortgages and those that are “subprime” candidates. Generally, these divisions are defined by credit ratings. However also incorporated into the equation is income level, job tenure and a number of similar categories. Subprime loan applicants, if they are awarded a mortgage, pay higher interest rates than those in the prime category. In other words, the more of a risk you are deemed to be, the more expensive the loan will be.
However there are also an enormous number of people who fall into the subprime category simply because they have no credit. By some estimates, 50 million people lack traditionally established credit — but still have track records in paying regular bills such as rent, utilities, insurance, and telecommunications. The absence of a credit history shouldn’t be a barrier to obtaining a mortgage. After all, many people prefer to pay as they go to avoid debt. Nevertheless, if you don’t have a history of owing it is difficult, if not impossible, to borrow.
If You Want to Borrow, Owe Somebody
Traditionally, credit history looks at the number of trade lines a consumer has opened and his or her payment history. To generate a traditional credit score, a borrower must have one trade line that is at least six months old, with a balance on it. Fair Isaac Credit Services, Inc. estimates that 50 million U.S. consumers have credit histories that can’t clear that hurdle. These nontraditional borrowers are disproportionately Hispanic (24 percent), African-American (14.6 percent), and recent immigrants. Also included in this category however are recent college graduates who have poured every penny into their education and who are poised to enter a lucrative professional career.
The Federal Housing Administration (FHA) and conventional secondary market programs offer ways to establish a borrower’s creditworthiness other than the traditional approach of relying on use of credit cards, installment loans, mortgages, and similar borrowing methods. Alternative approaches can help borrowers who might otherwise get shut out of the prime market — and the lenders who might not otherwise reach them.
Although many people now renting do not have traditional credit histories or scores, they do want to become homeowners. Fannie Mae estimates that 5 million renters without credit scores can afford to purchase a home.
New Qualifying Methods
About 500,000 new homebuyers without traditional credit scores complete a home purchase through FHA or the subprime market each year. By taking advantage of nontraditional credit history programs now offered in the secondary mortgage market, lenders can avoid needlessly relegating would-be borrowers to the subprime market. The Federal underwriters Freddie Mac and Fannie Mae have developed methods of developing creditworthiness ratings on people who pay cash for their products and services. These are termed Non-Traditional Mortgage Credit Reports (NTMCRs). Generally speaking, the process involves reviewing the loan applicant’s record of periodic payments: to landlords, auto dealers, medical bills, childcare services and so forth.
The evolution of developing mortgage eligibility for those who are accustomed to living with a cash economy is a substantial step forward in the housing market. What remains questionable is why people for whom this is the cultural norm must fall into the subprime market, be deemed greater credit risks and therefore pay higher interest rates than those who have a history of borrowing.
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