Saturday, October 29, 2016
Sarah Skidmore Sell
Applying for a home loan? You may want to consider paying off your credit card bill first.
Thanks to a recent change by major credit rating agencies, mortgage lenders can now look at whether you pay off your bill every month or keep a balance. That means home buyers who pay off their credit cards may earn an advantage when looking for a mortgage.
Historically lenders reviewed basic information such as your total debt and whether you were on time with your payments when deciding whether to make a home loan. But they didn’t know whether you were paying off your credit card or other revolving debts in full or carrying a balance month-to-month.
That changed in September, when two of the major credit rating agencies, Equifaxand Transunion, began offering what’s known as “trending data.”
Lenders now have access to a more comprehensive view of a borrower’s debt management habits, specifically how much someone paid off each month on those accounts over the past two years. And they may reward those who regularly pay more than the minimum on revolving debts or pay them off in full.
The remaining credit reporting agency, Experian, is also expected to begin offering trending data soon. It is the first time in 30 years that the standard information provided to lenders on credit reports has been updated, according to Equifax.
The change was driven by Fannie Mae, the mortgage giant that guarantees many of the loans in the U.S. It found that all other things being equal, borrowers who paid off their credit card every month were 60 percent less likely to become delinquent than borrowers who make only the monthly minimum payment. As a result, Fannie Mae will now regularly review this information to help improve its risk assessment.
The final decision on who gets the loan still remains with the bank or lender, who can decide whether or not they want to consider this factor.
Experts say that while it’s still early in adoption, Fannie Mae’s influence over the industry means they expect it to become part of the regular mortgage review process.
Fannie Mae, credit bureaus and other industry experts say they intend to use the additional information to expand the number of loans available, not to penalize those who do carry a balance.
“It’s going to benefit someone who is on the border today,” said Mindy Armstrong at Fannie Mae.
Consider two people with otherwise equal credit profiles: Jack and Jill. Jack makes the minimum payments each month, while Jill pays her cards off in full. They may both have been “maybes” in the loan officer’s mind, but this factor could tip Jill into the approved pile.
“It’s just one factor of the risk assessment,” Armstrong said. “These are all things you can do put yourself in a better position.”
Your credit score and credit worthiness will ultimately be determined by many other factors — most importantly whether you pay your bills on time and how much of your available credit you use. So paying down debts more aggressively may have an added bonus of improving your utilization rate, and thereby your credit score too.