Education is a big part of understanding the value of specialist lenders. The other is recognising which clients need a specialist product. Pepper has come up with some simple steps to help brokers help their clients...
Imagine that a lender has just advised you that they will not accept your loan submission for your client. The reasons they give are that your client did not meet the requirements of their credit scoring model or mortgage insurer, or perhaps they have a default registered on their credit report that you were not aware of.
In other words, you submitted the application as a prime loan, and this submission has been declined.
Pepper Australia has devised a successful approach for you, as a broker, to deal with in these types of situations, so you can find an alternative solution for your clients that still meets their immediate needs.
By following these guidelines, you will ultimately increase your chances of retaining these clients for the long term.
Once you’ve identified that the client’s current financial situation will not be accepted under prime credit criteria – or after a decline from a lender – there are some preliminary steps to take:
- Identify the specific reasons why the client is not eligible for a prime option;
- Confirm that you have one or more specialist providers on your panel that accept the specific reasons for your client’s ineligibility for a prime loan;
- Conduct a serviceability check, using the specialist lender’s serviceability calculator, to ensure the client can afford the solution.
What is specialist lending?
As you get to know more about your clients and their financial situation through your process of enquiry, you may come to the realisation that they will not fit prime lending criteria.
Instead of turning away these clients or asking them to ‘wait until their situation improves’, you may be able to provide an alternative solution now with a specialist lender.
There are many reasons why certain borrowers will not meet the lending requirements set out by traditional lenders:
- Credit scoring – many lenders and mortgage insurers have adopted statistics-based credit assessment models that do not offer the flexibility specialist lenders can provide.
- Loan purpose – the reasons for finance, such as to pay out tax debt or consolidate multiple personal or business debts, may be rejected by the prime lender.
- Income requirements – borrowers with irregular income, such as contractors, who do not have up-to-date tax returns, may not fit the criteria of prime lenders.
- Impaired credit history – this can include borrowers who have experienced a ‘life event’ such as a marriage breakdown, illness or a failed business venture and are often viewed as too high-risk, even if they have overcome the event that caused the impairment.
A common misconception is that specialist borrowers are all credit-impaired.
However, an average of only 35 per cent of borrowers who require a specialist solution would’ve had a previous default.
Specialist lending is a natural extension of the prime process, so you are well placed to integrate these types of loans into your wider selection of solutions.
What to do when your client requires a specialist lender
Before you dive in and start discussing specialist lenders with a client, particularly after a prime decline, do your homework.
Firstly, identify the specific reasons why your client does not fit the criteria set out by the prime lender. You would have taken detailed notes during your preliminary assessment and you can refer back to these to build your case.
If you have received a decline, go back to your notes and try to identify the gaps. That is, try to identify things your client did not make you aware of and use this information to prepare a thoughtful response. The reasons for decline are not always clear-cut, but it is important to seek as much detail as possible from the lender so you are prepared for the conversation with your client.
Next, you need to confirm that the specialist providers on your panel are able to provide a solution for your client’s circumstances before you discuss them as an option. It is important at this point not to make promises you can’t deliver.
Remember, you are trying to build trust with the client. If you are proposing a specialist lender that is not their first preference, you need to ensure that this lender is able to cater to their needs.
Once you’ve identified the lenders that can accommodate your client’s needs, you now need to conduct a serviceability assessment to deem that the loan is suitable and that the client can afford the solution. You must demonstrate evidence of their capacity to repay, a clear benefit to the client, and of course, that the client will not enter into the loan with hardship.
When you have completed the preparation above, you are in a position to go back to the client.
PEPPER’S 5-STEP PROCESS TO POSITION A SPECIALIST HOME LOAN
1. ACCEPTANCE MODE
Create a positive environment for your client so they can accept their circumstances and move forward.
2. OFFER THE ALTERNATIVE
Educate the client and introduce the specialist lender that you are proposing they move forward with.
3. OFFER THE REPAYMENT
Present the repayment in terms the client will understand. Calculate the proposed repayment that coincides with the client’s pay cycle.
4. LONG-TERM OBJECTIVES
Make clear to the client that the specialist solution is not intended to stay with them forever. Clarify that it will allow the client to obtain the home loan finance they need right now to meet their goals.
5. PROCEED TO APPLICATION
Apply for the loan.
My Mortgage Freedom’s Anthony Alabakov explains the specialist lending conversation goes with his clients
We must understand the clients’ needs and complete our fact-find while understanding their financial position and receiving as much financial information from them as possible.
Once we collate that, it just comes with time and experience how you assess that application in the best way possible.
Engaging with the client’s accountant is very important. It is also another touchpoint to build our referral network. Explaining the options with the accountant and getting their feedback is also useful.
With specialist lending, it is more about self-employed clients. That is where I have seen the greatest uptake. I have then been able to go to my referral partners and say there are alternatives out there.
Accountants have been a great partner for our business. It’s just that education piece to clients, to referral partners.
The self-employed market is massively underserviced. That’s definitely one that we are trying to tap into.
The Adviser talks to Smart Lending's managing director about the benefits of using specialist lenders
Smart Lending managing director Melissa Gielnik is no stranger to the benefits of specialist lenders.
A long-term, PAYG client of hers had a loan with a major bank. They needed to consolidate.
Their income was fine, their payments were perfect – they hadn’t missed a payment on any of their debt – but their credit score declined with three different banks.
“There was no reason for their credit score to decline,” Ms Gielnik says. “One of the majors actually said to me that if they could do it manually, they would have approved it, but once the credit score is declined they can’t do that,” she says.
Ms Gielnik recommended the client go with Pepper, who gave them a rate of 5.1 per cent, and they did the consolidation at 90 per cent.
The outcome was a $1,800 monthly saving to the client.
“They are no longer interested in moving to a major lender, because they got a good rate anyway with Pepper,” she says.
“Pepper doesn’t credit score. Everything is a manual process, so they are real people looking at real deals.”
One of the growing issues for brokers who use major lenders is automated credit scoring, which can decline a loan application even when a client has a perfect record of repayments.
“You will send a client who is an existing bank customer to that bank for a home loan and their credit score declines when there is nothing wrong with the deal,” explains Ms Gielnik.
“But because it is automated, they can’t manually override the system. “Pepper has the advantage with their prime products through manual processing.”