Are you familiar with the concept of trended credit data? If you plan to apply for a mortgage loan in the near future, you need to be aware of this new rule in order to avoid higher interest rates or the potential rejection of your application.
Credit scores have always played a major role in mortgage lending risk evaluation, along with aspects of your payment history (primarily missed payments or failure to make minimum payments). Trended credit data digs deeper into your patterns of credit usage, and the major mortgage backer Fannie Mae has taken the first step by requiring lenders to use trended credit data for single-family borrowers. Trended credit data has been incorporated into Fannie Mae's Desktop Underwriter (DU) software that lenders use to assess creditworthiness.
The three major credit bureaus (Experian, Equifax, and TransUnion) have added significant amounts of data to their credit reports over the past three years. Credit reports used to represent a snapshot in time of your credit situation, but now they show your payment history for two years. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
This flood of new data has given credit bureaus and lenders new ways to assess risk by spotting trends and patterns that are greater predictors of repayment. These trends are matched up against other sources of data such as utility bills and employment records to create a more comprehensive (and predictive) credit profile.
"For nearly three decades, mortgage lenders have used the same static formula to determine whether or not someone receives a home loan," said Craig Crabtree, general manager of Equifax Mortgage Services. "Leveraging trended credit data to evaluate how borrowers actually manage and pay off their credit debt could have enormous potential in terms of opening up credit and providing many Americans with access to mortgage loans that they previously may not have qualified for."
Trend analysis could work either for you or against you, depending on the pattern it reveals. For example, if you are a "transactor" who always pays your credit cards in full and rarely carries a balance, you will be considered lower risk than a "revolver" who regularly makes their payments on time but frequently carries a balance. A TransUnion study determined that revolvers are three to five times more likely to default on credit cards as compared to transactors. The prior rules would not have drawn such a distinction between those categories.
Trended credit data can work in your favor if it reveals patterns that show an ability to handle higher risk or show that a single credit blip or missed payment is an anomaly in a relatively clean record. Consider an individual with multiple credit cards and regular heavy use of those cards resulting in high total credit utilization (using the majority of your combined credit limit). Typically, credit utilization in the 40% to 50% range is a dangerous sign, but if you regularly pay those higher balances off each month, the new rules will reduce the associated risk factor.
Other patterns evaluated include debt balances (are you paying down debt or adding to it), spending habits and any changes in them, and frequency of opening and closing of accounts.
In short, when evaluating your preparedness for a mortgage application you must look beyond your credit score. (Trended credit data may be incorporated into underwriting, but it has not been directly incorporated into your credit score as of this writing.) Look over your credit reports and think about the overall impression that they give to mortgage lenders under the new rules. Treat the report as if it were somebody else's, and assess whether or not you would lend that person money based on what you see. You may not have the capability of sophisticated trend analysis, but you can recognize when someone is running credit balances and struggling to keep up.
With an objective analysis, you can make a wise decision. Either forge ahead with confidence and apply for a mortgage loan, or take the steps necessary to correct your credit usage patterns and create trends that are more favorable.
While Fannie Mae is a groundbreaker in using trended credit data, other mortgage lenders (and creditors of all types) are likely to follow. Through proper management of your credit, you can turn these new rules from a potential problem into an advantage — and why would you pass up any advantage on a mortgage loan application?
You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.