Many mortgage lenders recently began scrutinizing more detailed credit data, including details about how the borrower has paid credit-card bills over the previous two years.
Borrowers seeking home loans should know that many mortgage lenders recently began scrutinizing more detailed credit data.
Fannie Mae, the government-controlled mortgage-financing giant, has revised its risk-assessment software to include an expanded version of a borrower’s credit report. The reports now include more details about how the borrower has paid credit-card bills over the previous two years.
Mindy Armstrong, Desktop Underwriter product manager in Fannie Mae’s single-family homes division, said the new information would give lenders a more nuanced understanding of how a borrower handles debt and whether they are likely to repay their mortgage. “It will help us better predict the risk of default on a loan,” she said.
Fannie Mae says its Desktop Underwriter software is used by about 2,000 lenders and more than 10,000 mortgage brokers. Fannie Mae backs more than a quarter of new home loans, said Guy Cecala, publisher of Inside Mortgage Finance.
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Historically, credit reports used in mortgage lending included a borrower’s balance, how much of their available credit they use and whether monthly payments are made on time, Armstrong said.
The new reports, however, include the actual amount paid each month, over a 24-month period. The lender can see if the borrower paid off a card balance in full each month, if they made just the minimum required payment and, if they paid more than the minimum, how much more.
“Essentially,” she said, “it will benefit those who make more than the minimum payment or pay in full.” That’s because those borrowers are deemed less risky.
But, Armstrong said, the new data is just one piece of information used to evaluate borrowers, along with other criteria like the borrower’s income and overall debt burden, and the size of the loan relative to the property’s value. “This is not the only thing we’re looking at,” she said.
Susan Chana, a spokeswoman for the credit bureau Equifax, said the extra information — “trended credit data,” in industry jargon — may help more borrowers who have middling credit scores but who have managed their credit-card debt responsibly, qualify for home loans. Equifax, along with TransUnion, is providing the expanded credit data to Fannie Mae, which then combines it into a merged report.
The use of expanded credit reports, along with other updates Fannie Mae has made to its software, may help bring some flexibility to mortgage-underwriting criteria, which have remained quite rigid since the financial crisis, Cecala said. “It could open the market up a bit,” he said.
But the changes could potentially harm borrowers who have been less diligent about paying down their card balances, said John Ulzheimer, a consumer-credit expert.
Here are some questions and answers about the new mortgage credit reports:
Q: When did the change take effect?
A: Fannie Mae made the changes Sept. 24.
Q: Does this mean I should always pay my credit-card bill in full?
A: Even if you can’t always pay the balance in full, it’s always a good idea to make more than the minimum payment, to pay down your balance and save on interest charges. The addition of the extra payment information in credit reports used in many mortgage applications means that paying more than the minimum, if borrowers are able, makes even more sense, Armstrong said.
Q: Will the extra payment details affect my credit score?
A: No, at least for now. The dominant consumer credit scores, like FICO, don’t yet factor in these extra details, Armstrong said. So while the new data may affect whether a borrower qualifies for a loan, it won’t have a big impact on the interest rate offered, she said, because loan pricing is determined mainly by your credit score. But, she said, it’s likely that credit scores will eventually be calculated using the expanded data.
Q: Will Freddie Mac and others adopt this expanded criteria as well?
A: That remains to be seen, Cecala said. Freddie Mac, the other big government-controlled mortgag- financing company, has no plans to use the expanded reports, a spokeswoman said. (Freddie backs about 18 percent of new mortgage loans, Cecala said.)