Curve

New standards mean higher credit scores for millions

Peter Miller
The Mortgage Reports contributor

In this article:

Credit scores are the key to financing at low rates. Whether you’re buying a home, car or another big-ticket item, higher credit scores equal lower interest rates. Now, the system is changing. New credit score standards mean you may get higher scores. Here’s what the changes can mean for you.

  • Old and unfair standards are being washed from the system. Your credit score may be higher as a result
  • You don’t have to do anything to get a higher credit score. The new standards kick-in automatically
  • Even more reforms are on the way. With higher scores, you may be better qualified to get financing

With these changes, now’s the time to check your credit standing with a mortgage lender. For millions of borrowers, the new standards will mean higher scores.

Verify your new rate (Nov 17th, 2018)

Not so easy

Higher credit scores may be in your future. The system is being changed to create more fairness, and “fairness” in this case may be your friend. The new rules can mean lower mortgage costs and bigger potential loans for millions of borrowers.

Credit scores are usually seen as cut-and-dried numbers that reflect the use of credit without fear or favor. That’s the idea, but it turns out that credit issues are complex.

Related: What is a “good” credit score, and how can you make it even better?

Take the issue of medical bills. You go to the doctor — and sure enough, there’s a bill for the services you receive. No problem. Your insurance company will work it out. Now the clock starts running. A bill in your name is outstanding, while you wait to see what your share is (and perhaps dispute the amount).

After 30 days, that account may appear “late” on your credit report. Your credit score goes down.

But that won’t be the case once credit scoring models complete their makeover.

Millions unfairly faced lower credit scores

It’s no surprise that after the housing collapse, lenders tightened credit standards. Mortgage lending went from promoting products like “NINJA” financing – a mortgage application requiring no verifiable income, no job and no assets – to imposing virtually unattainable standards, before settling down to today’s more reasonable requirements.

Related: 5 ways to raise your credit score today

Have lender demands become too tough? The Urban Institute estimates that 6.3 million borrowers have been locked out of the mortgage marketplace because of needlessly tight requirements — borrowers who otherwise should qualify for real estate financing.

Higher credit scores and the new math

Part of the mortgage application process concerns credit scores. Lenders very much want borrowers to exceed minimum credit standards.

Credit scoring models create scores from your credit history and give lenders hard evidence justifying a loan decision. Anti-discrimination laws require lenders to have a standard, non-discriminatory system for underwriting decisions; reducing credit decisions to a number and a calculation accomplishes this.

One quick way to ease lending standards is to simply accept lower scores. If the experience of the FHA is an example, there are virtually no chance lenders will take this route. Under the FHA program, borrowers with credit scores from 500 to 579 can get financing with 10 percent down. HUD’s report for 2017 showed that just .4 percent of approved borrowers had credit scores under 580.

Related: When you authorize (or not authorize) a credit pull?

Rather than accept lower credit scores (which few lenders do), why not create better scoring models? That, in fact, is what’s been happening.

3 improvements in scoring and underwriting

First, medical bills are now much less of a problem. The reason? They only show up in credit reports if unpaid for six months. That should be enough time for insurance companies to pay patient bills, and for patients to work out repayment plans with providers if necessary.

Second, millions of unpaid liens and judgments remain outstanding. Sometimes for decades. Now, they’re off credit reports unless they include the borrower’s Social Security number and/or date of birth. Eliminating potentially false or outdated information leads to higher credit scores.

Related: Buying a home with student loans

Third, there’s good news for FHA borrowers with student loans. If you’re not making student loan payments at this time, lenders can estimate your payment at 1 percent of the outstanding balance when calculating your debt-to-income ratio. Formerly, they had to use 2 percent. If you owe $20,000,  lenders will calculate a $200 monthly payment and not $400. This will greatly help with qualifying.

More to come – UltraFICO

The latest innovation is UltraFICO, essentially a system to track consumer cash flow to better understand how bills are paid.

Fair Isaac, an industry pioneer and developer of the FICO-brand credit score, has now announced the UltraFICO scoring system. The company expects that the new system will result in higher credit scores for seven out of ten borrowers.

So what makes UltraFICO different?

The company estimates that 79 million Americans have sub-prime scores (680 or below). Another 53 million lack sufficient data to generate a credit score. The idea of UltraFICO is to give consumers credit by tracking – with their permission – spending and payment (cash flow) activity.

Related: Buying a home with no credit score

In this way, it’s possible to get more data to support a stronger credit standing. Among the beneficiaries, says the company, are the self-employed, millennials, immigrant entrepreneurs as well as migrant savers.

What to do next? If you plan to buy a home, get pre-approved for a mortgage. It will make the buying process easier and can help you better understand your financial situation. Pre-approval means applying for a mortgage, including a review of credit reports and scores. The new standards might provide a happy surprise — a credit score bounce.

Verify your new rate (Nov 17th, 2018)