Low-to-Moderate Income Consumers Present $300 Billion Growth Opportunity for the Mortgage Industry

New TransUnion study analyzes the creditworthiness of this consumer segment and how lenders can grow market share and revenue

 Low-to-moderate income (LMI) consumers have traditionally been overlooked in the mortgage market and trail non-LMI consumers in terms of homeownership. A new study from TransUnion suggests closing this gap could yield mortgage lenders as much as ~$300 billion in refinance and purchase originations.

Roughly 120 million consumers – equivalent to approximately 50% of the credit active US population – are considered to be LMI consumers and as many as 95% of these consumers are credit eligible for a mortgage. These consumers are typically defined as having a credit score over 500* and exist across income levels; as many as 65% have an income greater than $50,000.

As such, this segment of the population can offer mortgage lenders a significant growth opportunity. Many LMI consumers may qualify for loans through the Federal Housing Administration (e.g., 3.5% down payment) or through Government Sponsored Enterprises (GSEs) such as Fannie Mae or Freddie Mac. Originating more of these types of loans can not only help close the wealth and homeownership gap, banks and credit unions can also earn Community Reinvestment Act (CRA) lending and service credits and become another source of revenue for mortgage lenders.

Loan Opportunities for LMI Consumers

LMI consumers who qualify based on Income and/or LMI Tract; Incomes modeled using CreditVision Income Estimator; MSA Median Family Income and Tract Income Based on FFIEC
*Based on VantageScore® 4.0

“Many financial institutions are interested in expanding financial inclusion efforts to better serve low-to-moderate income consumers and communities. However, they may not have the right tools at their disposal to find and reach specific LMI consumers who are in the market for a home purchase or may benefit from refinancing,” said Joe Mellman, senior vice president and mortgage business leader at TransUnion. “This can be a real win-win for lenders and consumers – lenders can grow their business by increasing awareness to consumers that can benefit and consumers are able to realize their dream of homeownership or save money with a refinance.”

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The Disparity between LMI and Non-LMI Consumers and the Growth Opportunity for Lenders

TransUnion’s study looked at the credit active population of LMI consumers from Q3 2019 to Q3 2020 and found a significant disparity in the number of LMI consumers with a refinance or purchase mortgage in comparison to the non-LMI cohort.

LMI consumers, for example, are 38% less likely to get a refinance and 34% less likely to get a purchase mortgage than non-LMI consumers. Should lenders take steps to close this gap, it could result in approximately 1 million more refinance loans and purchase loans and yield as much as $300 billion.

LMI consumers, however, often assume that they may not have sufficient credit to qualify for certain mortgage products. According to a recent TransUnion Consumer Pulse Survey, almost half of the 601-660 credit score population incorrectly assumed their credit scores are too low to qualify for a mortgage. Yet, many of these consumers are likely credit eligible for FHA or GSE loans.

When LMI consumers do apply for a mortgage, the study found there is also disparity in the funding rates in comparison to the non-LMI group. LMI applicants are 22% less likely to get a refinance loan funded and 38% less likely to get a purchase loan funded than the non-LMI group. This discrepancy could potentially stem from many LMI consumers being unprepared to navigate the mortgage process.

Lenders can address this issue and serve LMI consumers better by deploying effective technology solutions focused on financial literacy and the well-being of their would-be borrowers. TransUnion has partnered with FinLocker, a financial fitness app that helps LMI consumers monitor their progress towards mortgage readiness and streamline the homebuyer journey for them. FinLocker’s mortgage readiness assessment analyzes the consumer’s enrolled financial data and provides a personalized plan, tools and resources to increase their credit score, save for their down payment, and reduce their debt-to-income ratio to achieve mortgage eligibility.

“Several factors are used to determine whether an LMI consumer is credit eligible. By helping them understand where they stand on their path to mortgage readiness prior to their application, will provide a better overall experience and aid more LMI consumers in refinancing their home or making the transition to becoming homeowners,” said Henry Cason, CEO of FinLocker. “Tools like FinLocker that educate, empower and support consumers in the mortgage process will improve application and approval rates and help more LMI consumers get through the pipeline.”

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New Approach to Identifying Credit-Eligible Consumers

Lenders can also better tap into this segment by accurately finding consumers that are likely to qualify, and by looking at factors such as estimated income, census tract and homeownership vs. renter status, in addition to credit score.

To enable lenders to address the LMI market and identify credit-eligible consumers, TransUnion’s new Low-to-Moderate Prescreen Solution helps lenders better determine which consumers are more likely to be eligible for LMI loan programs and to then present firm offers of credit to those consumers. This allows lenders to tailor marketing offers while supporting lender commitments to affordable lending, in addition to driving greater awareness of credit eligibility among target consumers.

“Mortgage lenders are hungry to grow their market share among LMI consumers but to effectively do so, it is important to be able to identify which consumers are already eligible versus those that are on the cusp of becoming eligible. Lenders will then be able to employ appropriate strategies to help consumers with the greatest likelihood of approval, but also provide resources and tools to the consumers who would greatly benefit and may become homeowners down the road. Combining this with consumer-specific information, like how much a specific consumer could save each month, can be a real call-to-action with LMI consumers,” concluded Mellman.

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