Follow Patrick Linkedin Facebook
Email Patrick Email
Financial
Oct 1, 2014

New FICO Credit Score Formula Will Affect Homebuyers

Sponsored Content provided by Patrick Stoy - Mortgage Consultant/Owner, Market Consulting Mortgage

Credit scores have always been an important number that affects homebuyers’ ability to qualify for mortgages and specific rates. Ever since the 2008 crash, the importance of credit scores in the home buying and loan qualification processes has reached an all time high. It is certainly an oversimplification to say that a high credit score usually results in qualification for a low rate, while a low credit score typically meant a higher rate or no qualification at all. But that statement is also generally true.

Credit scores, widely known as FICO scores, were originally established by Fair Isaac Corporation to provide lenders with a basis for measuring risk and loan eligibility for borrowers. Credit scores are calculated using sophisticated algorithms that analyze consumer credit behavior, which is recorded and monitored in credit reports produced by three organizations: Experian, Equifax and TransUnion. Credit scores range from 300 (not good) to 850 (excellent).

This fall, FICO is announcing revisions to the formula it uses to calculate people’s credit scores. For certain groups of consumers, the revisions will result in better credit scores and better chances for home shoppers to qualify for mortgages and lower rates. The new formula, named FICO 9, will include several changes, but the three revisions that are likely to have the biggest impact for homebuyers and loan seekers are:
 

  1. Credit scores assigned to consumers with little or no credit history
     
  2. Removal of closed or settled collection accounts from the formula
     
  3. Reduced emphasis on medical debts

No credit history, no problem

Some people have little or no credit history, either because they are young and haven’t had time to establish credit, or because they intentionally avoid using traditional credit payment options. Currently, a lack of credit history is perceived by FICO as a negative and lowers credit scores. Under FICO 9, non-traditional sources will be used to help determine credit scores for people with minimal credit histories. For example, FICO will look at payment history and patterns related to cable, Internet, phone, utility and other bills and assign a credit score based on a person’s track record for regularly paying bills on time. FICO 9 will open the door for a substantial number of people without credit to get credit – and probably at fairly reasonable rates.

Settled collections won’t count

Another FICO 9 adjustment that plays in favor of borrowers is a new rule that says that all accounts that were in collections but have either been paid as part of a settlement or paid in full won’t be considered in the credit score calculation.

With the current FICO formula, the negative impact of a settled collection account can easily disqualify a loan applicant from approval. Let’s face it – sometimes people are faced with an unavoidable circumstance that makes it impossible to pay off certain debts. With FICO 9, people that square up past debts and get back on track may not receive a reduced credit score for old collections accounts.

Medical debts won’t hurt quite as much

Currently, medical debts are given the same weight as many other debts in FICO credit score calculations, which means that if you’re not paying off your medical bills in a timely fashion, your credit score is being damaged. However, since research shows that unpaid medical debt is not a reliable indicator of the probability of other delinquencies, like credit card balances or mortgage payments, FICO 9 is decreasing the weight assigned to medical debt in its credit scoring formula. FICO believes this formula revision will result in a 25-point increase in the credit scores of people who have overdue medical debts but no other overdue debts.

Of the three revisions listed here, the reduction of the negative impact of medical debts will likely have the least effect on consumers because many lenders already discount those debts as relative risk factors and make manual adjustments to their qualification models.

It’s unclear how many people will actually benefit from FICO 9, and the reality is that any noticeable change is probably quite some time away. As a rule, the mortgage industry as a whole is cautious when adapting to change and implementing eligibility requirement changes. However, at a time when qualifying for a mortgage has been getting more and more difficult, it is nice to hear that some actions are being taken to shift the momentum of that disturbing trend.

Patrick Stoy has 15 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or 910-509-7105.

Other Posts from Patrick Stoy

Mcm 14jan insight
Ico insights

INSIGHTS

SPONSORS' CONTENT
Nealjohnson 12191614553

What's the Role of the HOA?

Neal Johnson - Network Real Estate
Mc2 56882

Building Insights: Heath Clark

Scott Byers - Majestic Kitchen & Bath Creations
Jeff metrocopy

Public Adjusters are Your Advocates After the Storm

Jeffrey Feldstein - Metro Public Adjustment

Trending News

Coming Soon To Carolina Beach: Condos, Fork N Cork, Publix

Cece Nunn - Dec 17, 2018

Business Park Proposed For Hampstead Area

Christina Haley O'Neal - Dec 17, 2018

Half United Opens Its First Retail Location

Johanna Cano - Dec 18, 2018

In Downtown Wilmington, Port City Java Reopens On N. Front St.

Cece Nunn - Dec 18, 2018

Elizabeth Stelzenmuller Joins Business Journal, WILMA Magazine

Christina Haley O'Neal - Dec 18, 2018

In The Current Issue

KWHCoin Taps Into Blockchain

KWHCoin, a blockchain-based renewable energy company, has plans to install over 50,000 solar energy systems in Sierra Leone in 2019 with hel...


Top Stories No. 2: Realtors: Housing Market Still Strong

2018 Year in Review: Out of the gate in 2018, home sale statistics in the Wilmington area – including New Hanover, Brunswick and Pender coun...


Top Stories Of 2018

2018 sailed smoothly for much of the Wilmington economy for a while, with home sales rising and the addition of infrastructure at the port a...

Book On Business

The 2018 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.

Order Your Copy Today!


Galleries

Videos

Health Care Heroes 2018
2018 WilmingtonBiz Expo - Keynote Lunch with Eric Dinenberg, Rouse Properties