subject: Credit Score Changes and Mortgage Lending [print this page] Credit Score Changes and Mortgage Lending
These changes can be a benefit or a detriment depending on several new factors. Up to 50% of mortgage applicants could see their credit scores change by 20 points or more. The new formula is supposed to predict defaults better than the old system, which is used by mortgage lenders in over 75% of their lending decisions.
Amount of Available Credit
The ratio of account balance to the amount of credit available appears to have more influence on the new formula. The less available credit a mortgage borrower has on credit cards, the lower the score would be. More available credit would mean a better score. This change could have a broad impact on credit scores used by mortgage lenders to qualifying borrowers, if credit card issuers implement more cuts on their maximum limits. A borrower's score may drop if the available credit limit is reduced, whether an account has a balance or not.
Number of Open Accounts
It used to be that having too many open credit card accounts was viewed as a negative factor. However, it appears that has been reversed, provided that the accounts have not been delinquent or overused. Now, having more open and active accounts could have a positive effect under the new scoring system. A potential negative aspect of this change is that more credit card issuers may close seldom used consumer accounts. From a mortgage lenders perspective, underwriters will also have to change how they view borrower files.
Isolated Credit Issues
The new scoring model will apparently be more forgiving to mortgage borrowers who only have one major negative problem on their credit report. The scoring model calculates the severity and frequency of negative items. Depending on the item reported, isolated problems will have less impact as opposed to continuous and recurring late payments and delinquencies. Mortgage lenders and borrowers should welcome this change because of the potential upside of good borrowers not being lumped into a category of repeat offenders.
Small Collection Accounts
Collection accounts with an original amount of less than $100 are disregarded. Another positive benefit for borrowers with minor debts owed from parking tickets, unpaid library fines, small medical bills, or other disagreements.
Authorized User Credit
The previous FICO model allowed for authorized users on credit card accounts to build a positive credit profile without being the primary card holder. While some authorized user data is allowed, the new formula has reduced the ability to build credit based on this method.
Article written by Rick Smith at http://www.crhome.com, with additional mortgage lender information at http://www.ditech.com
