Mortgages And FICO Scores – A Beginners Guide To Buying a Home
(RepublicanJournal.org) – If you’re hoping to acquire a new home — perhaps your first home — you might think that it’ll be easy. After all, if you’re like most renting Americans, your rent costs more than a mortgage probably would. Unfortunately, there’s more to qualifying for a mortgage than your rental history or the amount you’re currently paying rent. Mortgage qualification is based on a complex set of factors, including income, time at current job, and your FICO score, more commonly known as your credit score.
And until recently, your FICO score calculation included things like mortgage payments, credit card payments, auto loan payments, and other borrowed credit payments — but not the exorbitant amount you pay monthly in rent, insurance, and more. This puts renters at an extreme disadvantage when it comes to purchasing a home. It’s like you’re paying into something invisible, or something that doesn’t count. Not only do you get no equity in a rented home, it’s almost like there’s no record of you paying for it unless you fail to make a payment on time (and then it affects you negatively).
New FICO Changes May Help You Qualify for a Mortgage
Individuals and families deserve homes, especially if they can prove they can afford them based on what they pay in rent. As inflation increases and the housing market remains strong, it’s becoming quite evident that many families are in this position. FICO scores, or “Fair Isaac Corporation” scores, are formulas that allow a lender to determine the level of risk it would require to lend to you.
The higher the risk, the higher the interest rate you’ll get. As a lender, it makes sense — they demand more money from you to cover the risk. But as a consumer, why would someone with less money have more money to pay?
Equifax, TransUnion, and Experian are the three main credit bureaus most lenders used to make lending decisions, and they use the standard FICO score.
However, a newer credit bureau, VantageScore, is fairer to renters, as it takes into consideration your rental payments and other fees renters commonly have to pay. Under new rules, VantageScore must be considered in the determination of a FICO score. This means that you could have a different home loan lending decision coming your way based upon this significant change.
Who Benefits From New FICO Rules?
Demographically, Black families will experience the most substantial impact when it comes to lending decisions, allowing more Black families to get into more secure homes now that their rental histories are taken into consideration with their credit score. Overall, this is predicted to affect nearly 11 million families hoping to get into homes.
The Federal Housing Financial Agency (FHFA) is the agency responsible for this change, but unfortunately, they haven’t set any hard and fast timelines about when these new FICO rules will take effect. However, it’s a good idea to keep an eye on these changes, especially if you’re considering entering the loan pre-qualification process in the next few years. Per the FHFA, it’s a “multi-year effort” to make the change, but it’s no doubt a good change coming to a FICO score near you.
While you wait for these changes, be sure to monitor your credit report, challenge any issues, pay down collections accounts, and continue to make all existing payments on time. If you can raise your score over the next few years and keep bad marks off of your report, you’ll be in especially great shape by the time the new FICO score changes go into effect. Best of luck and happy eventual house hunting!
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