Fannie Mae is updating its requirements for historical data to assist mortgage lenders. This means that credit bureaus will be providing lenders with information to review up to two years of debt repayment and balance history.
The purpose of these changes is to provide more credit to borrower's who have thin credit profiles but show consistently strong payment history.
Prior Underwriting Model
Historically, lenders only had access to a potential borrower's total outstanding balance of credit, credit utilization and overall credit availability.
This model worked reasonably well. However, lenders lacked details like:
- Whether reported payments serviced all or part of an individual's debt; or
- If patterns existed in the borrower's credit utilization.
In the end, using this model boosted the scores of those who were able to juggle more debt. But it also damped the scores of responsible consumers who minimized their credit lines and avoiding talking out debt.
Why A New Model Is Needed
Mortgage giant Fannie Mae conducted research showing that, all else being equal, consumers who paid off their credit card balances in full every month are far less likely to become delinquent than borrowers who make only the monthly minimum payment.
This research spurred Fannie Mae to update lender underwriting requirements to include a review of the borrower's prior two years of payment history and credit utilization.
This type of data is being referred to as "Trended Data". And it is hoped that this data will help lenders better evaluate the credit risk of individual borrowers.
An example of those who may have been left behind by the older scoring models is a consumer who only has one credit card that is paid off every month.
If this consumer also managed to avoid student loan debt and auto debt, that may end up providing a relatively low FICO score. Which is a poor outcome, considering how responsible this consumer otherwise appears to be.
When Will Trended Data Be Available for Lenders
Trended credit data is already available for lenders.
Credit bureaus are already updating their credit report models to assist mortgage lenders with the transition. As of today, lenders will have access to a borrower's history of credit utilization and more comprehensive payment data for the prior two years.
According to a a statement released by Equifax:
For nearly three decades, mortgage lenders have used the same static formula to determine whether or not someone receives a home loan. Leveraging trended credit data to evaluate how borrowers actually manage and pay off their credit debt could have enormous potential in terms of opening up credit and providing many Americans with access to mortgage loans that they previously may not have qualified for.
Equifax Mortgage Services
Hopefully, the inclusion of this "trended" credit data will allow mortgage lender's to look past just a raw credit score. Sometimes those scores mask the most responsible borrowers. These changes should help lenders to find ways to extend credit to borrower's who prove to be more responsible with their credit usage.
However, some consumers need to beware that mortgage lenders will be more carefully scrutinizing the prior 24-months of their payment history. If there is a pattern of only making minimum payments until recently, it may impact your chances of obtaining a mortgage, or impact your interest rate.
The bottom line, though, is providing credit to more deserving borrowers is a win for both consumers and the mortgage lending industry.