Answering Common Borrower Questions: “What is Alternative Credit Scoring?”

Your clients’ ability to repay a loan goes far beyond that one little number.

Did you know that only 1.7% of the scorable U.S. population had a perfect credit score as of last year? That means that, for 98.3% of scorable Americans plus those with no credit, there’s some room to improve.

Alternative credit scoring can help those borrowers with little or less-than-stellar credit paint a more complete picture of their finances as well as their ability to repay a home loan. But how many of these would-be owners even know that this option exists?

That’s where you come in.

Borrower questions like, “What is alternative credit scoring?” can provide the perfect opportunity for mortgage professionals just like you to ease anxieties, promote borrower education, and overall ensure your clients secure the loans they want and need. Talk about a win-win-win!

So, let’s dive into some of the most common borrower questions surrounding alternative credit scoring and their comprehensive answers:

“What is Credit Scoring?”

Before you can really get into alternative credit scoring, your clients will need a thorough understanding of traditional credit scoring.

It might be a good idea to come up with a clear, simple, templatized definition you can break out for any borrower. To go above and beyond, consider a small printout or email infographic with definitions and fast facts that they can refer back to whenever needed.

Here’s a sample definition you can start with:

“Credit scoring is a statistical analysis used to determine your creditworthiness. Basically, it’s a calculation performed by lenders and other financial institutions to rank your probability of repayment.”

You might also consider using this conversation as an opportunity to remind them of or even explain some of the factors that impact credit score, like credit utilization, payment history, length of credit history, new credit, and credit mix.

“What is Alternative Credit Scoring?”

Now that everyone’s clear on traditional credit scoring, you can walk them through the definition of alternative credit scoring.

Your next line might look something like this:

“Alternative credit scoring means using alternative financial information to determine your score. Alternative credit scoring models might also take factors like your rental payments, “buy now, pay later” payments, or even public records into account.

The goal (determining your probability of repayment) is the same. But the factors considered are different.”

“What are the Pros and Cons of Alternative Credit Scoring?”

Now that everyone is on the same page as far as definitions go, you can dive into some of the specific pros and cons together.

Consider a handout or email newsletter that covers the basics. You can even copy and paste the below if you’d like!

Pros of Alternative Credit Scoring

Greater equity. Borrowers who don’t have extensive credit (or any credit at all) can still typically be evaluated using alternative credit scoring.
Improved access. Borrowers who might not qualify with traditional credit scoring may be able to access a loan using alternative credit scoring.
Can be more complete. With more real-world data points, alternative credit scoring can paint a more comprehensive picture of your creditworthiness.

Cons of Alternative Credit Scoring

Not all lenders or financial institutions use alternative credit scoring.
Like with traditional credit scoring, mistakes can happen. You’ll need to double-check everything reported.
Some borrowers might be hesitant to share more personal information (like rent or utility information) than absolutely necessary.

“How Can I Tap into the Power of Alternative Credit Scoring?”

If your clients think that alternative credit scoring could meaningfully help them in their journey to homeownership, this will likely be their final question.

At this stage, you become less of an educator and more of a guide. You might want to start by asking some specific, individualized questions about the client’s credit situation. This will help clarify where they’re starting from and what their options might be.

Note that you might have to explain or even show the client how to check their traditional credit score.

Then, you might consider referring the client to a certified credit counselor in their area for help with improving their credit situation. Whatever the case may be, use your professional chops and best judgement to make an informed suggestion tailored to their unique situation.

Give the clients some time to think about what you’ve discussed and don’t forget to set a date and time for follow-up!