*A big thank you to Vicky Stringer with CIC Credit who put on a very informative CE class, “Focus On Credit”, for the Mobile Area Association of REALTORS on May 5, 2016. Below are a few interesting tidbits I picked up which may be helpful to homebuyers and REALTORS alike.
Are you a Revolver or a Transactor?? Don’t tell me, I don’t really want to know, but apparently Fannie Mae, (aka Federal National Mortgage Association), does want to know if you happen to be in the market for a home loan. A Revolver is someone who carries debt month to month on credit cards and/or store accounts, making minimum payments or otherwise not substantially reducing the balances. A Transactor pays off balances each month. Apparently, Fannie sees the Revolver as a greater default risk than the Transactor and therefore plans to consider this as a factor in future underwriting decisions. How big of a factor is not yet clear, but this could potentially have a negative impact for a lot of homebuyers.
In case you are not familiar, Fannie Mae is huge player in the secondary mortgage market, therefore many of the mortgage loans offered by banks and mortgage companies are processed using Fannie Mae underwriting software in order to meet strict Fannie Mae standards, otherwise the lender would not be able to sell the loan and may not be protected in the event of borrower default. So no matter where you apply, there’s a good chance that Fannie Mae is a big influence in the process of getting your mortgage approved and funded.
How will they even know your credit card payment history? Well, Fannie’s influence isn’t limited to the underwriting of your loan. At Fannie’s direction the major credit bureaus are changing the way your credit is reported to mortgage lenders. Soon, when a mortgage lender orders a credit report for a potential borrower the report will include trended data associated with all of the borrower’s revolving debt for the past 24 months. This is where the detailed information about how you manage your revolving credit will come from. With 2 years of payment history at the lender’s disposal this is not something that can be readily changed by paying balances down just before applying for your mortgage.
How much might this affect your ability to get a mortgage? That’s hard to know because it isn’t something that your loan originator, or the processor, or any other human will decide. Instead it’s all a function of the aforementioned underwriting software. With time we’ll see how it’s going to work, but presumably it will be a secondary factor, so if your debt to income ratios are good and you always pay your bills on time this shouldn’t affect you much, but if you’ve got a few collections in your not so distant past, or gaps in your employment history, or the home you want is at the top of your approval range, then a few maxed out cards might become a problem for you even if you pay them on time.
So if a new home is in your future be careful with the credit cards. It’s always been important but now even more so.
And while we’re talking credit reports;
Did you know that credit scores provided by the bureaus to mortgage lenders are different than scores they provide to other consumer credit lenders? It’s true. Credit is scored differently for mortgage purposes and the difference could be 100 points or more! This is also true for those websites who try to sell your own credit score back to you. What those sites will sell you is useless for mortgage purposes so don’t waste time and money trying to check your score yourself. Talk to a reputable local mortgage lender and let them pull your credit and explain what you need to do, if anything, to improve it.
To check your actual credit report, for free, visit AnnualCreditReport.com. This is the official site where you can get one free report per year from each of the three major credit bureaus. This is a free way to check for inaccuracies in your credit report and watch out for potential identity theft. This is not a score but an actual list of what your creditors have reported to the bureaus about your debts and payment histories.
What about credit repair companies? If you are trying to get a mortgage but there are genuine inaccuracies in your credit report a good lender will help you to resolve them. But if you have real credit issues due to late payments or defaults then paying a credit repair company to clean it up isn’t going to work and may even make things worse. Start with a reputable local lender. Even if they can’t approve a loan for you right now they will be happy to help you figure out the right things to do to make your credit better.
And finally, the major credit bureaus are making tons of money selling your personal and financial information to marketers. Make them stop!! Visit OptOutPreScreen.com. The online form let’s you opt out for 5 years, but you can print and mail a confirmation form to opt out of this nonsense for life.
*Thanks also go out to the folks at Trustmark Mortgage who sponsored the event and provided a wonderful lunch for the attendees. BTW, if you are in the market for a mortgage Trustmark does an awesome job!