Better Mortgage Rates Ahead?
U.S. consumers may soon receive an across-the-board credit score boost.
According to FICO score publisher Fair Isaac Corporation, the popular credit scoring model is about to receive a major algorithm update. Consumers may witness credit scores rising by 100 points or more when ordering their annual credit report.
For mortgage applicants previously turned down for an , , or conventional one because of a low credit score, the new FICO model may help to get applications approved.
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How Credit Scoring Works
Credit scores are a key component in a lender’s mortgage approval decision. This is because credit scores are meant to predict the likelihood of a person avoiding default on a mortgage.
In general, the higher a person’s credit score, the more likely that person will repay the bank on-time, as agreed.
Persons with low credit scores are most likely go 90 days without payment to the bank; a situation known as default, which leads to foreclosure.
There are tens of credit scoring models in use today, including the free credit report advertised on television and on the internet. For mortgage approvals, though, lenders use specific credit scores published by just three companies. These companies are Equifax, Experian, and TransUnion. Together, they’re known as the “major credit bureaus”.
The specific credit models used by lenders are as follows:
- For Equifax, it’s the Equifax Beacon 5.0
- For Experian, it’s the Experian/Fair Isaac Risk Model v2
- For TransUnion, it’s the FICO Risk Score 04
Each of these models allows credit scores of up to 850. 65 percent of the 850 maximum score is attributed to payment history and amounts owed; 25 percent is attributed to credit history and length of time you’ve managed credit; and, 10 percent is attributed to the types of credit to your name (e.g.; credit cards, auto loans, student loans).
Each of the three major credit bureaus uses a variation of the above model. Lenders, therefore, assign the middle of the three published scores as your “credit score”.
As an illustration, if your published credit scores are 745, 750, and 780, the lender will assign you a credit score of 750.
Beginning later this year, the FICO brand is updating its credit scoring algorithm. Many mortgage applicants will experience an increase to their FICO-brand credit score.
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Updates To Mortgage Credit Scoring
Fair Isaac Corporation is releasing an update to its popular FICO scoring model. The newer version purports to be “more predictive” and better on customers with limited credit history.
Among the biggest changes is a softer treatment on medical collection items.
In the newest FICO version, a model dubbed FICO Score 9, medical accounts which have gone into collection will not affect consumer credit scores with nearly the same force as non-medical collection items.
Consumers whose only negative accounts are medical collections should expect their FICO scores to rise 25 points.
Another major change is linked to customers with limited credit history.
In the new FICO Score 9 scoring model, a broader set of variables will be used to determine the borrower’s likelihood of default as compared to prior versions of the FICO model. This change is expected to help first-time home buyers with a history on of-time payments; and other borrowers who carry few monthly debts.
Lastly, the FICO Score 9 scoring model will change the way that credit bureaus look at paid collection items.
In prior credit scoring models, paying an item in collection has been known to harm a person’s credit score by “bringing the account current”. The new algorithm is expected to bypass such items, which should give a boost to borrower credit scores.
Applicants of all mortgage types are expected to benefit.
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The FICO Score 9 model is expected to boost consumer credit scores, which would help more mortgage applicants to get approved. However, it’s unclear whether mortgage lenders will adopt the new model for use in mortgage underwriting.
Today’s mortgage rates are low, however. Get a free mortgage rate quote online with no social security number required to get started and no obligation to proceed.
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