The Way Mortgages Are Approved Is About to Change
July 27, 2016 | Your Finances
This fall, Fannie Mae, one of two government-sponsored enterprises that backs the majority of U.S. residential mortgages, will change the way it assesses the risk of loan applicants, making home loans and lower interest rates accessible to more consumers. In the past, Fannie Mae placed heavy weight on a person’s credit score, but going forward, it will delve deeper into how the person uses credit by incorporating something known as “trended data.”
“Trended data is a snapshot of a consumer’s credit profile that goes back 24 months,” said Michele Raneri, vice president of analytics and business development at Experian. “This data allows lenders to get a full picture of a consumer’s balances, loan amounts and payments over time. Experian believes that integrating more data points offers a more robust picture of a consumer and his or her ability to use credit responsibly.”
Although credit bureaus have been collecting and using trended data for years, mortgage lenders had been focusing on a consumer’s credit score, which predicts whether or not a borrower might default in the next 24 months.
With trended data, mortgage lenders can now see how consumers previously handled credit rather than simply predicting how they might in the future. Credit scores reflect whether or not you pay your bills on time and how much debt you have compared to your income (your debt-to-income ratio); lenders will now also look at how much you pay each month.
In the past, the timing of payments held the most weight in determining one’s credit score, but now how much a borrower pays each month also comes into play.
People who carry a balance but pay it off every month, known as transactors, will be viewed more favorably by lenders. Credit bureau TransUnion estimates this change will bump the number of Super Prime borrowers, or those qualifying for the best interest rates, from 12 percent to 21 percent of the U.S. adult population.
On the other hand, people who carry a credit card balance from month to month, or “revolvers,” may be viewed less favorably. A 2013 TransUnion study found that revolvers who pay only the minimum amount due each month have a higher risk of defaulting on other loans, like mortgages. Going forward, they may have more trouble getting a mortgage. However, those who pay more than the minimum each month, even if it’s not the full balance, present less of a risk and may not be impacted by the change.
“Trended data is complementary information to give lenders further insight into consumer credit behavior,” Raneri said.
Trended data also includes a history of other bill payments, such as utilities, insurance and even child care, which may help those who don’t have credit cards or loans. These people, who may have been denied by the old system, may now qualify for mortgages.
While these changes will help lenders gain a better understanding of a consumer’s ability to pay back a loan, they will still factor in credit score, assets—including income, savings and investments—and other financial information. Although Fannie Mae is moving forward with these changes, Freddie Mac, which also provides liquidity to U.S. mortgages, has not decided to incorporate trended data yet.
If you are preparing to buy a home, you’ll want to keep these changes in mind. Remember that having a strong credit score may not be enough. Paying your credit card bills on time and in full each month, or at least paying more than the minimum amount due, should help you get the best possible interest rate.