Increasing use of alternative credit, such as rent or utility payment histories, along with a longer-view of credit histories of mortgage applicants is expected to not only help people with poor or no credit qualify for a mortgage loan, but other changes could help borrowers with good credit as well.
Mortgage finance company Fannie Mae - which with sibling company Freddie Mac backs most of the residential mortgages in this country - recently changed how it verifies a borrower’s ability to handle a loan.
A few changes are expected to offer the most help to borrowers, not only for those with poor or no credit history, but also for those with excellent or good credit scores as well.
Looking at longer credit scoring trends
Fannie Mae will no longer accept loans based on traditional documentation practices of collecting physical copies of pay stubs and tax data, but will begin using what credit scoring agency TransUnion calls “trended credit data.” Trended data looks at a person’s credit over 30 months rather than a momentary snapshot of one point in time. The change will take effect in mid-2016.
Previously, someone who ran up a lot of purchases on the day their credit was checked could appear unworthy for a loan. Long-term data - such as paying off a large amount of credit quickly - could make them more worthy of a loan, while making small payments over time could make them less so.
Bill-paying habits have been found to be key indicators of risk. Consumers who carry revolving credit balances have been found to be considerably higher credit risks than people who pay off their balances each month.
Trended data could help more consumers get into the “Super Prime” risk tier for the lowest-priced credit products, increasing it from 12 percent of the population to nearly 21 percent, according to research estimates by TransUnion.
Other lenders have already picked up the new methods, says Whitney Fite, president of Angel Oak Home Loans in Atlanta, GA.
“That’s a great example of the credit box continuing to widen,” Fite says.
Rent, utility, insurance payments could help credit
Nontraditional, alternative credit lines are also being considered. These include rental history, car insurance, cellphone and utility bills and monthly subscription services, says David Hosterman, branch manager at Castle & Cooke Mortgage in Greenwood Village, CO.
Having good credit with companies and on-time payments for 12 months are of customers with alternative credit at Castle & Cooke, Hosterman says. It also asks for 12 months of canceled checks or bank statements showing payments to those companies, he says. Technology improvements are allowing some of the changes, Fite says, such as making third-party verification of credit easier.
Home loan applicants who don’t have a credit score calculated by Fair Isaac Corp. are typically required by a lender to have their eligibility determined manually. But Fannie Mae is allowing borrowers’ data to be put into an automated system, making the process faster for everyone.
Help for extended families
Certain minority groups have had difficulty getting home loans in recent years, partly because they have lower incomes or less money for a down payment. They may also lack credit histories, which new rules by Fannie Mae are trying to help.
In August, it started a program allowing lenders to count income from nonborrowers within a household, such as extended family members living under the same roof, to qualify for a loan.
Non-occupying co-borrowers can also help someone qualify for a mortgage, Hosterman says. They go through the same qualification requirements that the borrower goes through, he says, and are typically from family members.
“We take into account income, assets, credit score, and other items when determining the qualification for both the borrower and the non-occupying co-borrower,” Hosterman says.
No more pay stubs
A simple change Fannie Mae is making is to no longer require physical copies of pay stubs and tax data. Borrowers won’t have to track down pay stubs to prove their income and that they have a steady job.
Instead, lenders can use employment and income information from a database maintained by Equifax, a credit scoring bureau.