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Credit scores are the key to financing at low rates. Whether you are buying a house, car, or other expensive item, a higher credit score equals lower interest rates. Now the system is changing. New credit score standards mean you can get higher scores. Here’s what the changes may mean for you.
- Old and unfair standards are being eliminated from the system. Your credit score may be higher as a result
- You don’t have to do anything to get a higher credit score. New standards enter into force automatically
- Other reforms are underway. With higher scores, you might be better qualified to get funding
With these changes, now is the time to check your creditworthiness with a mortgage lender. For millions of borrowers, the new standards will mean higher scores.
Check your new rate (July 13, 2021)
Not so easy
Higher credit scores may be in your future. The system is being changed to create more fairness, and “fairness” in this case can be your friend. The new rules can mean lower mortgage costs and larger potential loans for millions of borrowers.
Credit scores are generally viewed as sparse numbers that reflect the use of credit without fear or favor. That’s the idea, but it turns out that credit problems are complex.
Take the issue of medical bills. You go to the doctor – and of course, there is a bill for the services you receive. No problem. Your insurance company will take care of this. Now the clock starts to run. An invoice in your name is unpaid, while you wait to see what your share is (and perhaps dispute the amount).
After 30 days, this account may appear “overdue” on your credit report. Your credit score goes down.
But that won’t be the case once the credit scoring models complete their makeover.
Millions of people have been unfairly faced with lower credit scores
It’s no surprise that after the real estate collapse, lenders tightened credit standards. Mortgages have moved from promoting products like ‘NINJA’ financing – applying for a mortgage requiring no verifiable income, jobs, and assets – to imposing virtually unattainable standards, before adjusting to the demands. more reasonable today.
Have lender requirements become too stringent? The Urban Institute estimates that 6.3 million borrowers have been shut out of the mortgage market due to unnecessarily strict requirements – borrowers who otherwise would be eligible for mortgage financing.
Higher credit scores and the new math
Part of the mortgage application process is about credit scores. Lenders are eager to see borrowers exceed minimum credit standards.
Credit scoring models create scores from your credit history and provide lenders with hard evidence to support a loan decision. Anti-discrimination laws require that lenders have a standard, non-discriminatory system for underwriting decisions; reduce credit decisions to a number and a calculation gets there.
A quick way to relax loan standards is to simply accept lower scores. If the FHA experience is an example, there is virtually no chance that lenders will go this route. Under the FHA program, borrowers with a credit score between 500 and 579 can obtain financing with a down payment of 10%. The HUD report for 2017 showed that only 0.4% of approved borrowers had credit scores below 580.
Rather than accepting lower credit scores (which few lenders do), why not create better scoring models? This is in fact what is happening.
3 rating and underwriting improvements
First, medical bills are now much less of a problem. The reason? They only show up on credit reports if they haven’t been paid for six months. This should allow sufficient time for insurance companies to pay patient bills and for patients to develop reimbursement plans with providers if necessary.
Second, millions of unpaid liens and judgments remain unresolved. Sometimes for decades. Now they no longer have credit reports unless they include the borrower’s social security number and / or date of birth. Eliminating potentially false or outdated information leads to higher credit scores.
Third, there is good news for FHA borrowers with student loans. If you don’t pay off your student loan yet, lenders may estimate your payment to be 1% of the outstanding balance when calculating your debt-to-income ratio. Previously, they had to use 2 percent. If you owe $ 20,000, lenders will calculate a monthly payment of $ 200, not $ 400. This will greatly facilitate the qualification.
More to come – UltraFICO
The latest innovation is UltraFICO, essentially a system for tracking consumers’ cash flow to better understand how bills are paid.
Fair Isaac, an industry pioneer and developer of the FICO brand credit score, has now announced the UltraFICO scoring system. The company expects the new system to result in higher credit scores for seven out of ten borrowers.
So what makes UltraFICO different?
The company estimates that 79 million Americans have subprime scores (680 or less). Another 53 million lack sufficient data to generate a credit score. The idea of UltraFICO is to give consumers credit by tracking – with their permission – spending and payment activity (cash flow).
In this way, it is possible to obtain more data to support stronger creditworthiness. Among the beneficiaries, according to the company, are self-employed workers, millennials, immigrant entrepreneurs as well as migrant savers.
What to do next? If you are considering buying a home, get pre-approved for a mortgage. This will make the buying process easier and can help you better understand your financial situation. Pre-approval means applying for a mortgage, including a review of credit reports and ratings. The new standards could offer a welcome surprise – a rebound in the credit rating.
Check your new rate (July 13, 2021)