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Assessing Risk for First-Time Homebuyers

It is a great time to be a first-time homebuyer. Interest rates are hovering at 4.5% for a 30-year fixed rate mortgage, and real estate values are beginning to stabilize. For lenders focused on providing credit to these new homeowners and growing origination volumes, new FICO research shows the benefits of using credit risk scores designed specifically to predict mortgage performance.

In this study, FICO analyzed the predictive power of the FICO® 8 Mortgage Score vs. the FICO® score to reduce origination risk for first-time homebuyers. Using a sizable data sample of 9 million consumers, we looked at first-time homebuyers opening a mortgage between May and July 2008, tracking their subsequent 24-month performance. We then compared the odds of good accounts to bad accounts at two common score cutoffs.

As the chart shows, a lender using a score cutoff of 660 that switched to the FICO® Mortgage score from FICO® score and held lending volumes constant, would have “swapped in” a population with odds of 14.5 and “swapped out” those with odds of 10.4. (Note that higher odds equates to lower risk, because it means that there are more good accounts for every bad account.) The improved predictive power translates into an annual savings of $7.6 million, assuming 130,000 booked loans during the period and the industry-standard cost of $50,000 for a defaulted mortgage loan. If the same lender used a score cutoff of 600, it would translate into a savings of $15.7 million.

  First-Time-Homeowner-Risk_chart 

These results show that a more predictive score for first-time home buyers can provide substantial gains, enabling mortgage lenders to safely grow portfolios in the current market.

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