Credit & Risk

Unlocking your borrowers’ home equity

Zest AI team
June 24, 2024

Borrowers locked out of HELOC? Let’s open the door

Home equity lines of credit, or HELOC, are a significant portion of any lender’s consumer portfolios. And for homeowners, accessing a HELOC is a game-changer for those looking to consolidate debts, cover emergency bills, or remodel their home. Saying yes to these loans means increasing your share of wallet and strengthening the relationship between you and your customers.

Yet, for nearly half of U.S. homeowners, securing a HELOC is a daunting challenge. The culprit: rate increases, strict debt-to-income (DTI) requirements, and traditional credit scoring methods. The average credit score for homeowners with a HELOC is 748, when more than 25 percent of homeowners have a credit score under 710, and 10 percent under 650. In addition, many homeowners don’t meet DTI requirements due to their employment or retirement status. It’s hard enough to house hunt, meet income requirements, save for a down payment, and work your way up to owning a home. For those who have already jumped through those hurdles, it can be frustrating to face yet another financial barrier.

On top of this, it can take anywhere between two and six weeks for homeowners to find out if they even qualify for a HELOC. It’s hardly a secret that a month-long wait for a potential loan denial is far from an ideal borrower experience. For families in urgent need of funds — whether for emergencies, debt reduction, or timely payments to suppliers and contractors — protracted delays can exponentially increase stress and worsen their financial conditions.

The solution: AI-automated HELOC underwriting

If you aim to reach these homeowners, you can’t just rely on traditional credit scores and outdated underwriting methods. Fortunately, today's lenders have the opportunity to adopt smarter, more efficient underwriting solutions, allowing them to confidently reach more qualified borrowers, faster.

Lenders who implement AI-automated underwriting can see a 20 percent or more increase in approvals with no additional risk, and make two to four times more accurate lending decisions than the national model. The ability to confidently say yes is not only good news for the borrower, but gives your lending business a competitive edge. AI-automated underwriting solutions can instantly assess credit risk for 80 percent or more of applications, leaving your underwriting team with more time to review appraisals, AVMs, and the necessary documents to quickly and accurately process HELOCs. When it’s a coin toss for approving the loan everywhere else, being the first lender to say yes is an act to remember.

Breaking down the HELOC barrier

Speed and accuracy are essential for credit risk assessments, and AI-powered HELOC underwriting can help. But speed and accuracy alone are not enough to solve biased decisioning — a pervasive and highly scrutinized issue within the financial services industry. As it stands, about half of all HELOC applicants are denied. And this rejection rate is not equal across racial lines — a recent Urban Institute report shows that 54.2 percent of Black homeowners, 48.2 percent of Hispanic homeowners, 36.7 percent of Asian homeowners, and just 26.5 percent of White homeowners are denied a HELOC.

To address these gaps, financial institutions need solutions that go the extra mile to prevent biased or disparate outcomes. Technology that can, for example, lift approvals for protected classes by 40 percent on average and ensure fair lending outcomes. Amid concerns about the worsening racial homeownership gap, the ability to take proactive measures in making accurate, impartial decisions is crucial for lenders today.

Smart, agile tools for a thriving lending ecosystem

Financial institutions play a pivotal role in broadening access to credit for all borrowers — that means lending across the spectrum, not just those with a credit score of 748 or higher. But you still need to do so while managing risk and making smart underwriting decisions. Despite rising HELOC balances, maintaining agility through market shifts and economic fluctuations remains crucial.

Equipped with the right tools, your institution can make those quick, accurate decisions that enhance both your consumer lending portfolio and your customer's experience. When you strike the right balance within the lending ecosystem, everybody wins — your institution, your team, and most importantly, your customers or members.

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