Alternative credit scoring could mean you can qualify even with weak FICO.
If you’re currently renting and a low or nonexistent credit score is one of the primary blocks to becoming a homeowner, then a new bi-partisan bill proposed by Ed Royce (R-CA) and Terri Sewell (D-AL) could be the bridge you need to clear the credit gap you face with today’s system.
The Credit Score Competition Act of 2015 aims to allow mortgage underwriters – specifically GSEs (government-sponsored enterprises) like Fannie Mae and Freddie Mac to use alternative credit scoring models that weigh more factors than traditional scoring models based on FICO. As a result, homebuyers who were previously considered too much of a credit risk to qualify could find a path to approval.
Basically, the bi-partisan congressional writers of the bill believe today’s current mortgage underwriting system is wrongly preventing qualified buyers from getting into the market because they lack a high traditional credit score. Often, potential homebuyers are disqualified because they simply don’t have a good FICO credit score.
While low credit scores can be the result of mismanagement of credit and debt, in other cases the low score is the result of other factors. Limited credit history for borrowers who are either young, right out of school or those who’ve moved to the U.S. is common. These borrowers simply haven’t had the opportunity to establish the robust credit history necessary to achieve a high traditional credit score.
Additionally, current scoring models often give weight to negative factors that may not really be a sign of credit worthiness. For instance, medical debt collections are a rampant cause of negative remarks in credit reports and are often a leading cause of bad credit for many Americans. Many experts believe medical debt should not be factored into creditworthiness because having one of these debts lapse into collections may not be a sign of irresponsible borrowing.
“Often, the applicant isn’t even aware a problem exists due to delays or other issues with insurance payments,” says John Councilman, former president of NAMP – The Association of Mortgage Professionals. “It is not uncommon to find a borrower who has an excellent payment history on installment and revolving credit that has a low score due to medical collections… Debt collectors exploit the outdated system regularly.”
Alternative credit scoring models weigh factors and calculate a consumer’s score differently. Things like on-time payments for rent and utilities are often considered in these alternate models, allowing consumers who don’t use or don’t have access to traditional credit to show they are a responsible borrower who can be trusted with the financial obligation of a mortgage.
Simply just paying utility and phone bills on time builds a positive payment history that, even now, can be used to prove financial responsibility to lenders. Upon request, these service providers can offer a 12-month payment history to lenders as “alternative credit.” So while a credit report is important, in the end a lender wants to see that you’re in the habit of paying your bills on time, whether it’s a credit card bill or an electric bill.
“Homebuyers who could qualify under these new scoring alternatives should proceed with caution however,” warns Consolidated Credit’s Housing and Business Development Manager, Maria Gaitan. “As these models allow more borrowers to enter the housing market, it’s up to each household to weigh the financial burden of taking on a mortgage to ensure they can manage it responsibly.”
Gaitan says this increases the need for free HUD-approved services like one-on-one housing counseling for first time homebuyers.
“Factoring in responsible financial actions like timely rent payments may help borrowers qualify for a mortgage,” Gaitan explains, “but homebuyers need to consider their budgets and long-term financial stability carefully before they make such a long commitment like getting into a mortgage. Housing counseling will be key in ensuring this new breed of homebuyer with low traditional credit scores is really financially ready for homeownership.”
Thinking of buying? Consolidated Credit’s HUD-certified housing counseling team can help you decide if it’s the right time for you to enter the market. Call 1-800-435-2261 to speak with a housing counselor at no charge. We also offer a mortgage prequalification calculator that can help you assess if your budget is ready for the financial burden of a mortgage.