Submitted by Chris Johns for On Q Financial
If you’ve been contemplating home ownership this year, there are new changes to credit assessment that could affect your ability to get through the loan underwriting process. Confused? Let’s step back to the basics of what it takes to get into a home, previously referenced in Part 1 of this article series.
A lender considers whether a potential borrower is credit-worthy, in other words— worth the risk, in holding a mortgage and it begins with the credit score, or FICO score. A borrower’s credit score is formulated and based on many variables: amount of debt held, amount of debt owed, and success in making timely payments of the debt. Before the loan process is taken one step further, a lender will learn a lot about you by your tri-merge credit score:
- Do you have a history of 30-day late payments?
- Do you have high debt balances?
- Do you have credit history?
- Do you have a car repossession or unpaid student loan(s)?
- Do you know what the newest credit “trend” is?
As of April 1, 2016, the Federal National Mortgage Association, “Fannie Mae”, adopted the use of trended credit data within its automated underwriting system “DU®”. What does that mean to you?
DU, or Desktop Underwriting, is an automated system used by Fannie Mae that takes a perspective borrower’s information to include credit data, and compares it to the Fannie Mae mortgage qualifier guidelines. If it passes through the DU, the borrower will be referred to as being given a DU approval*.
In the latest DU system versioning update, trended credit is included. The implementation of trended credit data takes credit assessment of the consumer one step further. In addition to weighing credit-worthiness by the numbered list noted above (#s 1-4), borrowers credit will be examined based on how monthly credit payments are made.
An easy way to understand this is by looking at the way advertisers are able to “know” which products or services would spark our interest. They know our interests by tracking our behavior online, a digital intuitiveness. Trend credit follows a similar line of thought.
According to the Director of Card Risk at a Top 25 retail bank, the following was cited in a document from the credit agency Equifax, “Trended data is the most important tool developed by the credit reporting agencies since the advent of the credit score.”
Creditors can now use our credit behavior to further assess credit risk by understanding our decision-making process in how we choose to handle credit.
Here’s an example of trended credit data at work:
|
Borrowers |
Borrower A |
Borrower B |
|
Credit Card |
X |
X |
|
Balance Owed |
$5,000.00 |
$5,000.00 |
|
Monthly Payment Made |
minimum only |
50% of what is owed |
Borrower A stacks up the same as Borrower B, except that Borrower B pays half of the credit card balance that is owed while Borrower A makes the minimum monthly payment only. When you only make a minimum monthly payment, it increases your debt (associated interest rates on unpaid balances).
Don’t panic. For most of us, having some credit issues is almost a rite of passage of our younger years. If this is striking a painfully personal chord, it’s okay. There are things that you can do to get on track sooner than later.
Get Your Credit Back on Track
- Pay down credit cards, balance should be <30%
- No credit?…get credit—an installment loan or credit card
- Review your credit report for negative info: anything that is more than 7 years old should be removed (charge-offs, accounts included in bankruptcy but still showing, etc.)
Ideas that never get put into a plan remain as an idea. If you think home ownership is a great idea, let’s put a plan together to make it happen. It starts with your credit.
Look for Part 3 in this article series to be posted next month which will focus on the Pre-Qualification process towards home ownership.
For more information or to contact Chris Johns at On Q Financial, visit us online or call (360) 347-8000.
*DU approval subject to additional terms and conditions during the loan process through loan closing.
On Q Financial, Inc. is an Equal Housing Lender. NMLS# 5645 / Washington Lender #CL–5645. This material is provided for information and educational purposes only. On Q Financial, Inc. is not a credit repair company.The material is deemed to be accurate and reliable at the time of being published. This is not an offer for extension of credit or a commitment to lend. Some restrictions may apply.
