What is a FICO score? The FICO score was established by Bill Fair and Earl Isaac which is short for Fair Isaac Company. A FICO score is a number that tries to predict consumer spending habits and behavior. This number is supposed to help businesses make better lending decisions when dealing with borrowers. The score is basically a credit scoring system. However, companies can use alternatives to the FICO score that will help them increase the size of their loan portfolios.
When lenders make loans based on collateral, it gives them assets to go after if a borrower defaults on the loan. For example, the loan officers should review all the assets that borrower owns and use the assets as conditions for approving loans. These assets may include homes, cash, businesses, land, stocks, bonds, cars, retirement accounts and other possessions.
Lenders can also consider grating or approving a loan only if the borrower agrees to direct deposit payments. This clause will help the banks collect payments from borrowers’ bank accounts at specific time. The banks can encourage this concept by offering a better interest rate or perhaps a slightly lower monthly payment.
Income Based Loans
It will also be advantageous to grant loans based on income. If a borrower does not make a specific amount of income, do not approve the loan. Banks get into trouble when they approve loans that customers can not afford to repay. For instance, it can be a bank’s policy to approve loans based on a 30% debt ratio and an income of not less than $30,000.
Government Backed Loans
To help diversify a bank’s loan portfolio, it is important that the bank use government backed loans. Loans that are secured by the government will be repaid by the government if the borrower defaults on the loan. In fact, some banks are able to offer better rates when loans are insured by the government.
Buyer Assistance Programs
Buyer assistance programs can be used for many different types of loans. If a borrower applies for a loan, the bank can have the loan officer sit down with the borrower and explain why the loan was denied. The borrower may be able to clear up information in a credit report. For example, the bank can give the borrower a few months to respond to any negative financial information. In other words, develop an in-house assistance program for borrowers.
Finally, lenders must also verify all loan documents to make sure that the information is accurate. Make the borrower show more proof of income and determine his or her ability to repay the loan. There are new rules in the lending industry. Lenders will be given more protections against defaults if they make what is called "qualified loans." Therefore, it is important for lenders to do extreme due diligence when approving any loan.