There is a profound change to credit reporting taking place, and it could effect how people qualify for a mortgage. Starting September 2016, Desktop Underwriter Version 10 (DU) will roll out, an automated underwriting system lenders will use to gauge the risk versus “lendability” of consumers applying for a mortgage. The big change with this version is that trended credit data will now be taken into account for mortgage applications.
Effective on September 24, 2016, mortgage giant Fannie Mae (Federal National Mortgage Association) will require all lenders to use trended credit data for its underwriting process. The idea behind this new policy is to increase the scope and level of detail of a consumer’s credit data so that lenders may more accurately predict spending the behaviors of the borrowers.
Trended credit data provides an expanded view of the consumer’s behavior with revolving and mortgage debt for a full two-year period. With trended credit data, lenders will be able to see a consumer’s past balance, payment record, minimum payments, and credit utilization history month-to-month. In the past, lenders could only see the current data of debt balances and if they were current, but not the “trend” of how a consumer was managing their debt over the months and years.
What that meant was someone who knew they’d be applying for a mortgage soon could pay down their balances all at once to create a favorable debt-to-income ratio, even if they had maxed out credit cards and paid only minimum payments in the recent past.
But now with trended credit data, Desktop Underwriting will be able to see that they did that, and judge their credit worthiness on the entire two-year frame, not just a current snapshot.
Trended credit data will allow lenders to distinguish between a “transactor” and a “revolver” consumer. A transactor is a consumer who uses their credit cards but pays in full every month, while a revolver keeps adding to their debt balances and probably pays only minimum payments every month – far riskier to a lender who wants to expand hundreds of thousands of dollars to them with a new mortgage.
Of course, data shows that if someone is maxed out on debt, uses credit cards instead of savings for purchases, and pays only the minimum, they are far likelier to default on their mortgage. Research reveals that borrowers who never exceed their credit limit are 75% less likely to miss a payment, and consumers who pay off their credit card balances every month are also 60% less likely to become delinquent.
This will mostly affect mortgage applicants who look to pay off balances and clean up their credit only a month or two before trying qualify for a home loan. But the good news is that trended credit data only applies to conventional loans, so those who apply for a FHA loan or VA loan won’t be impacted at all. With low down payment options and flexibility with lower credit scores, FHA loans are often the favorite of first-time buyers or those who don’t have a fully formed credit picture but still want to buy a home.
If your trend shows that you have been paying down or off your balances and using it responsibly over that period of time, underwriters will look at you more favorably. Even if you had financial problems or had to rack up debt a year or two ago as a one-time event, maybe from a job loss, medical issue, or divorce, but then have displayed a track record of getting your credit cards back under control and paying them off since then, underwriters will also see this and consider you favorably.
The official account is that trended credit data will not only apply only to conventional mortgages, but those run through Fannie Mae’s automated Desktop Underwriting system. Freddie Mac, Fannie Mae’s contemporary, is expected to use this feature in the future, but hasn’t implemented it to date.
So how can the average consumer adjust to the implementation of trended credit data? Think long term when managing debt, just like everything on a high school transcript applies to your final GPA. A solid plan includes paying down credit card balances to zero, or keeping low balances. Be careful about making large purchases or maxing out credit cards on a regular basis and never exceed your credit limit or miss a payment.
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If you foresee buying a home or even refinancing, come talk to us as soon as possible so we can look at your credit report together and set a plan in motion that will get you the best possible low-interest mortgage!