Mountain Mortgage Guy: New credit scoring model may help homebuyers (column)
November 7, 2018
Besides death and taxes, the one thing we all share is having a three-digit credit score. This little number is a guesstimate of the probability that you will pay your bills on time and plays a huge roll in your ability to get credit and the rate you will pay.
There are many versions of credit scoring and companies that provide scores, and many are basically companies selling a "cotton candy" version of a credit score arrived at by a formula they derived simply to sell a credit score for a fee. The definitive gold standard of credit scoring trusted by the mortgage industry is done by the Fair Isaac Co. (FICO for short). The secret formula they employ to determine a credit score is highly secretive but has proven fairly accurate for decades. Nevertheless, mortgage lenders are always looking for the next crystal ball.
Chicken or the egg?
One of the longstanding criticisms of relying on credit scores is the chicken and the egg issue of getting credit without having a credit history. Which comes first? While there are ways to establish credit early in life (or after a life-changing negative credit event such as that caused by a job loss or divorce) millions of people have to rely on paying cash because they don't have a credit history or a very thin credit history.
“There are many versions of credit scoring and companies that provide scores, and many are basically companies selling a ‘cotton candy’ version of a credit score arrived at by a formula they derived simply to sell a credit score for a fee.”
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To address the part of this situation for those with only one or two accounts, FICO has developed a new scoring method called FICO Ultra. This program takes whatever credit history you have and combines your banking information in determining your credit worthiness. This can allow a consumer to factor in regular payments such as rent, insurance and utilities, as well as get some street cred for not bouncing checks and being responsible with a bank account.
FICO Ultra is expected to come out in 2019 and will be an opt-in program for consumers who wish to share their banking history to prove they are credit worthy. As to how it will be incorporated into mortgage decisions remains to be seen.
This is not for people with no credit and may or may not be allowed for use by mortgage lenders. But what it likely will be good for is allowing consumers with only one or two credit accounts to beef up their credit profile to apply for consumer or installment loans or bank cards for which they might not otherwise be eligible. Some credit issuers may opt to use it as a tool, and some may not believe in it, at least initially.
Hopeful homebuyers will want to use every tool they can to build a significant credit history, and this should widely expand their options and improve the odds they will get approved for their dream home.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtnmortgage guy.com.
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