New Credit Score System May Help Buyers Get a Mortgage
February 17th, 2016
February 17th, 2016
In December 2015, U.S. House of Representatives Ed Royce (R-CA) and Terri Sewell (D-AL) introduced a new bill, known as H.R. 4211 or the Credit Score Competition Act, which could help many first-time homebuyers secure mortgage funding by changing how lenders look at credit scores. While the bill is only in the first stage of the legislative process and has a long way to go before it becomes a law, future homebuyers should keep an eye on this bill.
The Credit Score Competition Act would allow government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac to use other credit-scoring systems besides the FICO credit score in the underwriting process for residential home loans. This could be a big deal for future homebuyers who may currently be disqualified for a home loan due to low or non-existent FICO credit scores. But these same individuals may otherwise be good candidates for a home loan, because they pay their rent on time – something the current credit-scoring models don’t necessarily take into account. Therefore, by being evaluated under different credit-scoring systems, these potential homebuyers could receive approval for a mortgage they may not have qualified for before.
“Fannie Mae and Freddie Mac are the largest mortgage purchasers in the nation, but they rely on credit score models that don’t necessarily take into account something as simple as whether borrowers have paid their rent on time,” said Rep. Sewell. “Homeownership is an integral part of the American Dream that shouldn’t be out of the reach of low-income, rural and minority borrowers who lack access to traditional forms of credit. This legislation takes an important step towards addressing this issue and helps make homeownership a reality for more Americans across the county.”
Additionally, Royce and Sewell say because Fannie Mae and Freddie Mac own about 90% share of the secondary mortgage market, and they only rely on the FICO credit-scoring model, they’ve created a near monopoly in the credit-scoring field. But by allowing the use of other credit-scoring models, this would promote competition and innovation in the industry.
How Could the Credit Score Competition Act Help You?
If you’re a first-time homebuyer, a minority or have a lower income, the current FICO credit-scoring system may exclude you from getting a home loan – even if you’re creditworthy. But The Credit Score Competition Act, if passed, would allow Fannie Mae and Freddie Mac to use a different credit-scoring model to judge your creditworthiness and determine your financial responsibility.
Also, if you have a short or nonexistent credit history, you could be rejected for a home loan simply because you use cash instead of credit – even if you’re financially responsible, save your money and are debt-free.
If the current credit-scoring system is negatively impacting you, we suggest you keep watch on the Credit Score Competition Act’s progress through the legislative process. However, if you need to buy a new home now, contact the mortgage specialists at Grandview Lending. We can examine all of your options and help you find the best solution based on your homeownership needs. Give us a call today at 317.255.0062 or toll free at 866.690.4920.
Photo credit: 123RF / Mark Carrel
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