What Will The New Credit Scoring Model Do To Your Mortgage Application?

You’re about to get a new credit score. Will it be better or worse?

You’ve probably spent years trying to get your credit right. Now the credit bureaus and mortgage lenders are changing the rules again. Will you be penalized? Perhaps your credit rating will get a boost? How will other new mortgage rules and trends impact your ability to buy real estate in the future?

Your New Credit Score

Beginning next year, Fannie Mae will not only be accepting new credit scoring models, but will be requiring that mortgage lenders use them. This new credit scoring system relies on what’s called ‘trended credit data’.

New trended credit scores based on data from TransUnion and Equifax aim to provide lenders with better insight into borrowers’ habits over time. Instead of just a snap shot of your credit on the day you apply for a loan, trended data will reveal how much debt you carry over time, and your payment habits. For example; being able to tell whether you have carried debt on your credit cards for months, or whether you pay early and pay off debts every month. This will go back 30 months, which is well beyond what mortgage lenders look at today.

How Trended Credit Scores May Affect You

Under the new credit scoring system some individuals may end up with much higher credit scores, and others much lower credit scores.

Via the New York Times, a TransUnion representative says the goal is to more accurately score consumers. However, estimates that this system could double those that qualify for the best loans and interest rates suggest this may have more to do with boosting profit for lenders in the secondary market.

An EVP of the financial services business unit at TransUnion says this is already a popular scoring model for car loans and credit cards. Given how much easier that type of credit is to qualify for, the change could bode well for many mortgage borrowers. After all, it’s more than a little ironic that in the past you could walk into a car dealer with a 500 range credit score, and walk out with the keys to two brand new BMWs worth over $100,000, with no income or asset verification.

The Glitches of the New Credit Modeling System

Where the new credit scoring system is likely to hurt many homebuyers and those trying to refinance is that it is harder to game your credit score in a short period of time. Now you can just keep on track for 24 months, and pay down your credit card bills and rocket your credit score in a month. Requiring almost 3 years of good credit and payment history, without carrying significant debt, could mean it takes a lot longer for some to qualify to refinance or buy a home. This could specifically be a big challenge for those planning to buy in 2016, and who are not aware of these changes. Real estate professionals need to get busy educating the buyers they have in the pipeline. Real estate investors with rent to own deals and lease options out there need to make sure buyers are prepared so they can still qualify for loans.

Good News for the Anti-Debt Crowd

There is even better news ahead for the growing crowd of anti-debt and anti-credit crowd. Many have been shunning credit cards, student loans, and auto loans, but most still need mortgages. Fannie Mae’s president and chief executive says that there are also new plans to adjust automated underwriting to account for non-traditional credit. That means easier qualifying for those that haven’t used credit, and those living off the credit grid. They’ll be able to use “rent, utility, and cellphone bills”.

Summary

Access to mortgages may already be easing, and some are anticipating a big push for purchase loans as refinances die off, and 7.3 million boomerang buyers become eligible for mortgage loans again. However, for right now, financing is much easier for real estate investors due to Dodd Frank, new crowdfunding portals and conduits, and big venture capital backing new social finance portals. The key for those buying a refinancing a primary residence is going to be staying on top of these new credit scoring changes.