Get ready, Fannie Mae/ Freddie Mac, the largest purchasers of mortgages will begin requiring new credit reports as early as September. These new reports can include “trended credit data” and could have an impact on potential home buyers with their home-financing process as well as the real estate professionals working with them.
What is trended credit?
Trended credit data provides a different lense for lenders to view a prospective borrower and their credit information; it analyzes how a borrower handles their various credit payments. Basically it is going to give more weight to consumer’s revolving credit lines and their usage.
Until trended credit data was added to the system, credit reports for mortgage lending only pointed to outstanding balances a borrower had. Trended credit data provides a more detailed view of the consumer by using 24 months of a consumer’s past balance, payment, and credit utilization history.
“It will be beneficial to borrowers who pay off their credit card balances each month,” says Stephen Casil, Vice President of Secondary Markets at Lyons Mortgage Services, Inc.
Fannie Mae noted that borrowers who pay off their credit cards at the end of every month are 60% less likely to be delinquent on their mortgage than borrowers who only make their minimum payments, even if those minimum payments are made on time.
This update allows lenders to ask themselves a helpful question: is the borrower paying the minimum on their credit lines monthly, or are they frequently shedding credit each month?
Also, self-employment will be more closely looked at under the new model. Self-employed borrowers have income that can vary from year to year and introduces an additional layer of risk to a mortgage loan application that is not usually present with borrowers who have a steady salary. This was already a consideration when applying for a mortgage but with the new guidelines self-employment will be bigger factor.
From an underwriting perspective, the addition of trended credit data provides insight that is not painstaking to comb through, and might actually make the entire process more efficient. While not big and flashy, this tweak in evaluating consumer habits could prove useful when assessing credit risk. Future home buyers and real estate agents should stay informed so they can understand how these changes can impact their home buying process.
by Monika Bialokur and Andrew Sophocleous