Change is coming for the first time in 25 years to the way Fannie Mae (a pretty big name in the mortgage industry) looks at the credit history of a mortgage borrower.
Starting June 25, the credit card history of a first-time home buyer or a borrower with a smaller credit history (both traditionally considered to be “riskier applicants”) may be able to push them into the realm of home loan approvals. The information, loosely called “trended credit data” comes strictly from the management of credit cards owned by applicants going back 24 months in time.
So, what does this mean for you?
Here are the four main things that you need to know about trended credit data, and how it can affect your home loan approvals.
- The Definition
The trended credit card data that will be taken into consideration during the mortgage application process will come directly from the management of credit cards for the past two years. Other debts, like student loans, do not factor into this section of evaluation.
- The Difference
Two terms have been used to define those who pay off the credit cards (or pay more than the minimum balance) every month, and those who pay the minimum due and have the rest transfer over to the next month.
A “revolver” is someone who consistently makes minimum payments on their credit cards every month, with the remaining balance rolling over into the following month.
A “transactor” (opposite to a revolver) is someone who pays down their credit card debt more aggressively.
Being completely equal across the board concerning other factors, transactors will be seen as lower risk borrowers.
- The Purpose
The new information that comes from trended credit data further distinguishes transactors from revolvers. Borrowers with little credit histories (like Millennials buying their first home or borrowers who weren’t heavily involved in credit), but have demonstrated responsible use of the credit they have had will now have the potential to move away from being “unscorable,” with more lending opportunities opening up to them.
- The Reality
For applicants who tend not to qualify for mortgages because of credit reports that aren’t backed by a large credit history, this change could open them up to possible lender – but only if they’ve demonstrated responsible credit card usage. Other factors, like credit scores, income and assets still matter when applying for a mortgage.
While there is no official word yet on whether Freddie Mac will follow suit in the changes put forth by Fannie Mae, it still stands that better management over your credit cards can help you become less of a risky borrower. With less credit history to work with, it’s better to be a “transactor” than a “revolver.”