Changes To Mortgage Risk Evaluation

There is a new addition to how many mortgage banks view a loan applicant’s credit risk. Recently “trending credit data” has been added as a vehicle to get a more in-depth view of a borrower’s credit management skills when applying for varied mortgage products. It used to be that if you paid your revolving (credit card) balances a few months prior to loan application it would reflect a much lower credit risk borrower.  Now underwriters have a more in-depth view of your paying patterns.  

All three major credit bureaus say that if you are a revolver (those who carry balances month-to-month) you are 3x more likely to default on new credit cards and 5x more likely to default on current credit cards, than transactor’s (those who pay off their credit cards in full each month).  

The Federal National Mortgage Association (FNMA or Fannie Mae) along with Equifax and TransUnion, did this launch of the new “trending credit data” format for mortgage loan underwriting June 2016. Lenders are required to use this data before approving borrowers for a mortgage. Craig Crabtree, general manager of Equifax Mortgage Services said, “…Fannie Mae is helping to make the home mortgage market smarter, safer, and open to more consumers…trended data will help improve the evaluation of risk and reward the responsible use of credit…”

In the past lenders were only shown a “snap-shot” of the borrower’s current balance on revolving credit which allowed borrowers to pay off balances a few months prior to applying for a mortgage with little to no penalization. This new timeline data capture gives lenders an in-depth understanding of a consumer’s financial situation and payment behavior over the last two-years.  It will allow lenders to better evaluate whether an individual can be trusted with a mortgage, what interest rate to give them, or whether they should be denied altogether.  Trending data has the chance to help individuals who have an extended history of proper credit management by potentially giving them access to better interest rates and loans, but conversely, it also has the chance to hurt those who only pay the minimum each month. 

Financial institutions are now able to see: 

• Whether you are paying off debt or adding to it (while only paying the minimum). 
• Changes to payment patterns – If a borrower suddenly starts only paying their minimum it indicates that they will soon default.
• The dollar amount that you spend each month. Lenders want to see what your discretionary income is each month. 
• As always, if a borrower has a high utilization rate it will negatively impact their score, but with the trending data lenders can look deeper, and see how well an individual handles their high utilization rate. For instance, if a customer is using 40 – 50% of their limit, but has never defaulted or had any ill effects - than a lender may decide to approve them as a lower risk.

Now may be the time to change your spending and payment habits, especially if you plan to apply for a mortgage in the next few years. The last thing anyone wants is to find their dream home and have it cost them an additional $100,000+ in interest or be denied from purchasing the home altogether. Plan ahead and monitor your reports, if you see any inconsistencies speak with one of our FICO Certified Credit Experts before calling the bureaus and taking credit restoration into your own hands. Most individuals who try to repair their own credit end up giving the creditors information that can potentially destroy our chances of helping them.