Sometime later this year, possibly this summer, your credit score may change – and maybe not for the better. In addition, mortgage companies will experience some changes. And all of this means that if you plan to buy a home, you need to pay attention to these changes and understand what they mean when it comes to getting a mortgage to buy a home. Let’s take a look at how FICO’s new credit scoring method will impact the mortgage industry in Cincinnati and Northern Kentucky.
Overview of New Credit Scoring Method
FICO’s new credit scoring method (or FICO 10) will most likely be rolled out and implemented this summer. This new model will take into account a borrower’s account balances and missed payments for the last two years only. This means that an estimated 110 million Americans may see a change in their credit scores.
These credit-score changes will likely include a drop of around 20 points for an estimated 40 million Americans. This will happen because the new method will weigh the past two year’s payment delinquencies more heavily than the previous credit scoring method did. In addition, people with high credit utilization ratios will see a drop in scores, and those with personal loans will be flagged as risky.
Biggest Changes for New Credit Scoring
The biggest changes for Cincinnati and Northern Kentucky consumers in the new credit scoring model include:
TOTAL DEBT MATTERS MOST
FICO 10 will now weigh your total amount of debt more heavily, rather than also considering where and for what that debt is. This means that consolidating debt will have little effect on your credit score (although it can still lower interest). The important thing will be how much debt you have and whether it is increasing.
PERSONAL LOANS WEIGH HEAVILY AND CONSOLIDATION DOESN’T HELP
Personal loans will weigh more heavily with the new credit scoring. This means that those people who take out a loan to consolidate, say, credit card debt will be penalized.
DELINQUENT PAYMENTS WILL HAVE A GREATER ADVERSE IMPACT
Missing and/or making late payments will be even more damaging to your credit score. Lenders report late payments to credit bureaus, and under the new credit scoring, they will cause a more severe drop in your credit score.
INSTALLMENT DEBT LESS DAMAGING
Also under FICO 10, credit card debt will be penalized more than installment credit such as mortgages and student loans.
Implications for the Mortgage Industry and Consumers
The implications of FICO’s new credit scoring method for both the mortgage industry and consumers in Cincinnati and Northern Kentucky (and everywhere else really) are many.
It will be a mixed bag for consumers. An estimated 40 million (as indicated) will see a drop of 20 points or more in their credit scores. And another 40 million may see their scores increase by a similar amount.
Mortgage lenders are expected to experience around a 17% decrease in mortgage defaults. The upshot may be that they may be more willing to extend loans at better rates to qualified borrowers.
Preparing for Effects of New Credit Scoring Method on Mortgage Industry
The effects on the mortgage industry will not be felt right away because the lion’s share of mortgages are backed by Fannie Mae and FreddieMac, and these still have to use the older FICO scoring. But they will likely switch over to the FICO 10 model sometime next year.
Borrowers who begin working on their credit to align it with the new scoring will thus be ahead of the game. For under FICO 10, mortgage lenders will take a very hard look at your past two year’s credit history. The mortgage industry will see a lower default rate, but borrowers will run up against tougher two-year standards.
The Conclusion to Draw
So what conclusion should we draw concerning FICO’s new credit scoring method and its impact on the mortgage industry in Cincinnati. Just this: if you plan to by a home, the sooner you get busy shining up your credit score, the better off you’ll be. And that, in turn, means that getting a good deal on the home you purchase becomes even more critical. And our agents can help you do just that.