Consumers whoâ€™ve had credit challenges due to medical debt will soon be getting some relief.
Fair Isaac Corporation, creator of the FICO score, the most widely-used and influential credit scoring system, recently announced a new version of its credit scoring system which will differ substantially from prior versions.
Dubbed FICO Score 9, the new version is expected to raise credit scores for millions of consumers, as well asÂ increase the number of consumers eligible for today's lowest mortgage rates.
Higher credit scores are linked to lower mortgage rates.
"FICO" is a brand name, but much like "Kleenex" and "Band-Aid", it has come to represent a class of products. When a person refers to your FICO, they're referring to your credit scores.
CreditÂ scores range from 350 to 850; and are meant to predict the likelihood of a person going into default on a loan. In general, a loan defaults after 90 days of non-payment.
To build your creditÂ score, credit bureaus use debt information made available by creditors to the three major bureaus -- Equifax, TransUnion, and Experian.Â The FICO Score 9, though, is expected to raise the FICO model'sÂ scores because, in part, overdue medical payments will be given less attention than in prior versions.
FICO scoresÂ are used in 90% of all lending decisions and thisÂ is why the introduction of FICO Score 9 is potentially such a big deal.
Mortgage lenders typically use the middle of your three reported credit scores to determine your eligibility and mortgage rates, which means that, with FICO Score 9, borrowers will likely get approved more often, and with lower mortgage rates.
Earlier this year, a government watchdog group released a report stating that millions of consumersâ€™ credit scores have been "over penalized" by medical debts in collection; andÂ a recent Federal Reserve study which showed that nearly half of all consumer debt on a typical credit report is linked to unpaid medical expenses.
Furthermore, the Fed report showed, many of theseÂ medical costs have been billed incorrectly.
Derogatory items in person's credit history can negatively affect a credit score by 100 points or more. For potential home buyers and homeowners looking to refinance, aÂ drop of 100 points can be the difference between a low mortgage rate and a high one; or a mortgage approval and a denial.
The current FICO model -- FICO 8 -- makes no distinction between unpaid medical and non-medical bills; nor, between paid and unpaid accounts in collection. The FICO Score 9 model was developed, in part, to address these issues.
FICO Score 9 will become available to the three national credit bureaus this fall. The major bureaus will evaluate it, then release it to mortgage lenders later in the year.
The main changes in the FICO Score 9 model are:
The credit bureaus expect FICO scores to rise at least 25 points for many of today's borrowers, although some consumers may see credit score improvement which far exceeds just twenty-five points.
Note, however, that the FICO Score 9 may not be used for mortgage approvals for some time, or maybe ever. Lenders are expected to give the model a thorough workout toÂ determineÂ how accurately it predict problematic loans.
If the model predicts credit default better than FICO Score 8 and other prior models, it will be adopted industry-wide. Otherwise, it won't.
Today's mortgage rates are at their best levels of 2014. Regardless of your credit score, current rates are as low as they've been since June of last year. It's a good time to comparison shop loans, and to apply for a mortgage.
Get today's mortgage rates online now. Rates are available for free with no social security number required to get started and no obligation to proceed whatsoever.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
Marie M. Real Estate Agent
I have been a Realtor for more than 30 years and enjoy The Mortgage Reports. It's terrific to learn something new almost every day.
Jerolyn C. CPA
The Mortgage Reports isn't just basic mortgage rate information -- it's analysis on rate changes and trends, and updates on the laws in lending. Subscribing to the site's daily updates is worthwhile.
Amit D. Research Scientist
The Mortgage Reports gave me valuable information, tips, and advice which helped me to acquire a home with the lowest mortgage interest rate. Keep up the good work!
2016 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)