According to a study that was recently conducted by Zillow.com, small lenders are more willing to consider helping people with low credit scores than larger financial institutions. Small lenders also are more open than larger lenders to the possibility of working with borrowers who are seeking loans with lower down payments.
For the purpose of the study, small lenders were classified as being licensed in two states, while large lenders were classified as being licensed in 49 states or more. The goal of the study was to analyze the number of lenders that declined to provide certain borrowers with a quote for a loan and the interest/annual percentage rate that was offered. Statistics were compiled during the fourth quarter of last year and included 71 small lenders and 31 large lenders.
Roughly 50 percent of larger financial institutions don’t provide a quote to borrowers who are seeking an FHA loan with less than a 5 percent down payment, compared to 21 percent of small lenders. Borrowers with a down payment averaging between 6 percent and 19 percent found that all of the small lenders in the study were prepared to offer them a quote. This differs from the larger lenders, as the data indicates that 13 percent were unwilling to provide a quote for borrowers looking for non-FHA loans with a down payment between 6 percent and 19 percent.
Borrowers with a credit score between 600 and 639 were turned away by two-thirds of the larger financial institutions. Only a third of the borrowers with the same credit score who knocked on a smaller lender’s door were left out in the cold.
As we move toward the higher end of the spectrum, where borrowers with 20 to 30 percent down payments and credit scores over 720 are seeking 30-year loans, there is more activity among larger lenders looking for this type of business. Not surprising!
What I did find surprising was that smaller lenders offer lower interest rates for upper-tier borrowers than larger financial institutions.
The bottom line is that small lenders offer a wider degree of flexibility in considering people who will be making lower down payments and have less-than-perfect credit. They also offer lower rates to borrowers in the upper echelons. Understanding that the larger lenders are more risk-tolerant than smaller lenders, since they have a broader diversification of investments and the means to hire more analysts, this is one of the biggest ironies in the financial world.
The fact that larger lenders are more risk-averse than smaller lenders is in part because they are subject to increased regulatory scrutiny as a result of the reforms that followed the recession. The most important factor, however, is that the larger financial institutions do not have the benefit of in-person consultations, at least not for the most part.
Small lenders have a chance to get to know their clients and what drives them. This includes going over what might have damaged their credit in the past, both to understand it and to identify a feasible resolution.
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Patrick Stoy has 16 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or 910-509-7105.