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
Sabrinaheadshot300x300

What Do Your Office Walls Say About You?

Sabrina Davis - Port City Signs & Graphics
Burrus rob headshot 300x300

Cameron Executive Network Celebrates 15+ Years of Mentoring

Robert Burrus - Cameron School of Business - University of North Carolina Wilmington
Mike stonestreet 300x300

For Association Boards, CAI Membership has its Privileges

Mike Stonestreet - CAMS (Community Association Management Services)

Trending News

Changes Coming To Hanover Center, Oleander Drive Site

Cece Nunn - Feb 21, 2018

Downtown Wilmington Store Moving To Mayfaire Town Center

Cece Nunn - Feb 22, 2018

Papanikolaou Family Opens Symposium At Mayfaire

Jessica Maurer - Feb 21, 2018

South Front Phase II Apartments Fully Leased

Christina Haley O'Neal - Feb 20, 2018

Peño Mediterranean Grill Welcomes Customers To New Location  

Jessica Maurer - Feb 21, 2018

In The Current Issue

Firms Find Benefits In Mergers

The Cheek family operated an Ocean Isle Beach-based residential real estate firm, Resort Brokerage, for nearly two decades years before deci...


Tax Reform

On Super Bowl Sunday, real estate developer Don Lashley actually found time to talk business. The subject? The omnibus tax reform bill signe...


How To Give, Despite Deduction Increase

Wilmington-area nonprofits, like their counterparts across the country, are watching to see what happens to charitable contributions in 2018...

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

WilmingtonBiz Expo - Keynote Lunch with John Gizdic, CEO, New Hanover Regional Medical Center
Wilmington's Most Intriguing People of 2017
2017 Health Care Heroes