FICO announced new scoring models in January 2020. If you’re not familiar with the changes, it’s a great time to have a conversation with your trusted lender(s). This will have an impact on people’s ability to get mortgages and loans in general.
As I heard it discussed on a radio program today, lenders have traditionally used a credit score that behaves like a snapshot. The new scoring models will instead allow lenders to view customers’ credit worthiness based on the trends of the customer. This should help to more clearly assess how well a customer utilizes the credit they already have and hopefully keep them from making purchases that they truly can’t afford.
Do they run cards up to limits that are too high, showing potential for burying themselves in debt? Lenders want to see that customers can carry debt but they also want to see that they’re able to pay it off, or at least pay most of it off.
The two items of greatest note with the new scoring models are:
- Late Payments
- Credit utilization should be below 30% of the allowable credit limit
You might be thinking... a person who has late payments would always have had a hit on credit, but with the new system, this might show a greater trend toward someone's inability to manage their finances, and thus have a greater adverse impact on credit than it did in the past. Same thought process with credit utilization: if you're running your debt higher and higher, you're showing a tendency to overextend yourself. Both of these items make you a higher risk to a lender.
The new FICO suite should be available this summer, but check with your lender for their insight on the timing of implementation of the new models. Getting credit in line with the new guidelines should result in less defaults on loans.
All of this underscores the importance of having your clients work with reputable lenders, and getting their financial picture reviewed prior to looking at houses. That has ALWAYS been important but is essential with the new FICO scoring models. Do you have clients who’ve been waiting to talk with a lender until they get closer to the time of looking at houses? The changes make it more important for them to reach out for a financial check-up now which will help them be fully prepared to be strong buyers when the time comes.
Encouraging this communication will be time well spent for you, and your buyers will be grateful.