February 13th, 2020 1:29 PM by Jackie A. Graves, President
First-time homebuyers are often surprised to learn they can
qualify for a mortgage, especially if they don’t have great credit. But,
changes to the way FICO measures credit scores are set to make it more
difficult for many people to qualify. If you’re looking to buy a home this
year, or anytime thereafter, here’s what you need to know.
“Fair Isaac Corp., commonly known as FICO®, has built a new suite of
scoring models that will be available from all three credit reporting agencies
(Experian, TransUnion and Equifax) to lenders by the end of 2020,” said Experian.
“The new models will treat late payments and debt more severely, but will also
now consider historical information about your credit card balances and payment
amounts. Your FICO® Score will likely change as a result.”
Just how could this impact borrowers? Consumers with high FICO
scores who continue to manage their finances well may actually see an increase
in their scores. “This change will create greater separation in the 600s,” said Forbes.
“If you are in the lower 600s and struggling to make payments on time, there is
a chance your score can go down further. If you are in the high 600s and making
payments on time and trending toward lower debt levels, your score could
Joanne Gaskin, vice president of scores and analytics at FICO,
told NPR that,
“About 40 million Americans are likely to see their credit scores drop by 20
points or more, and an equal number should go up by as much.”
The five main factors that FICO has long used in its
scoring models will remain. They are: payment history, dollar amount owed, age
of credit history, credit mix and new credit accounts. However, the new FICO
scoring system “expands into new territory, with the goal of giving
lenders a more precise assessment of your credit risk,” said Experian. “It
considers your trended data.”
Trended data offers a closer look at your financial picture over
the last 24 months, specifically focusing on how you have managed your existing
accounts. Trended data has not typically been shown to lenders for the purpose
of qualifying home buyers…until now.
“Those with scores below 600 who continue to miss payments or
have blemishes on their credit will see even larger declines in their scores,”
Magazine. “FICO…will soon start more harshly penalizing the scores
of consumers who have rising debt levels or who fall behind on loan payments.
The company will also flag certain consumers who sign up for personal loans,
which is a growing area of debt.”
With these new changes, it’s more important than ever to be
diligent about protecting your credit. Would-be homebuyers will want to:
Pay your bills on
time—This has always been important but is even more critical now.
Late payments have always been a red flag for lenders, but they may be even
more harshly penalized once the new program is in place. “Delinquencies will
hurt scores more” now, said Experian. “The impact of late payments is more
pronounced than with prior FICO® Score versions. This means consumers who
miss payments are likely to experience a more severe drop in their credit
scores” under this new model.
Pay down credit card
balances—According to FICO, borrowers should “keep revolving debt below
30% of their available credit so that they don’t see a larger impact to their
credit score,” said REALTOR.
your credit reports and make sure that nothing has fallen through the
cracks like a small medical bill,” said Forbes. “Catching up on those
payments may show a positive trend.”
Avoid personal loans—"The scores
will weigh personal loans more heavily, the Wall Street Journal reported, in
order to penalize borrowers who consolidate debt with personal
loans and then go on to rack up more debt,” said MarketWatch.
Don’t cancel your
credit cards. Closing accounts can actually hurt your score. “When it
comes to credit cards, it can help to hold on to older accounts for a long
time,” said NPR. “Doing that gives consumers a more established credit
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