Vail Daily column: Changes in credit reviews will help and hurt homebuyers
It seems that the only thing that changes more than the weather in the Rocky Mountains are the rules for getting a mortgage. The past few years have seen hundreds of regulatory changes coming from about every government entity except the dog catcher’s office, and I’m sure those folks have an opinion as well. Indeed, we might be better off asking the dogs in the pound for advice regarding some of the nonsense that has emerged from the Consumer Finance Protection Bureau.
And there is one more change soon to kick in. It is called trended credit history. Like so many of the new rules, it brings both promise and concern.
Getting a mortgage to buy a home takes four things: A down payment, adequate income, adequate assets and good credit. Lacking adequate measure of any of the above will generally turn your loan application into a denial. An excess of one does not offset the requirements of all. However, differing loan programs do have differing measures of what is deemed adequate.
In terms of credit; in the past, a quick glance at an applicant’s credit score would suffice to determine if the credit element was sufficient. The higher the score, the better the rate and often the lower the down payment required.
In addition, borrowers could often pump up their credit scores by paying down or paying off one or more credit cards because the credit score reflected the current mix of obligations and account balances, and paying off a couple of cards might jack the score up 50 or 75 points in a single stroke.
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What is changing now is that the credit score will evaluate the long-term trends in an individual’s credit usage, as well as the current mix of balances and accounts. This will eliminate paying off a couple of cards and having a new credit score for the efforts.
This means that people who pay their accounts down regularly will have stronger scores than those who carry balances close to the credit limit for long periods of time.
Creditors typically report balances about once a month and it is combined with the weighted average of how close you are to your credit limit and the age, type of account and history of on-time payments to determine your credit score. The new score will weigh in the balances throughout the past year to two years against the balances when the score is generated.
This presents a new element in keeping a high score. In particular, some people use credit heavily and do pay it off every month, and they will have the same problem as someone who uses credit heavily and carries a large balance. The credit report will only show the balance on the day the account was billed and will not differentiate if the balance is due to current activity or charges from the current month.
One approach would be to make a note on your calendar of when your credit cards bill each month, and make your payment before the bill comes out. This would result in the lower balance being reported each month and should cause your score to improve. Another approach is to ask for credit limit increases periodically but don’t use the available credit. Part of the formula for credit scoring is the usage of available credit, if you don’t use it all, then you are deemed a better credit risk.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com.