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How Will Changes in Credit Score Calculation Affect You?

If you’re tired of paying a fortune for rent in the Chicagoland area, it could be the ideal time for you to consider purchasing your own home, which allows you to save money in the long run and start building equity.

Your credit score plays a vital role in your ability to qualify for a mortgage. The higher the number, the more likely you are to get approved for a loan with a lower interest rate. Those with credit scores of 500 and above can also apply for a mortgage insured by the Federal Housing Administration, which offers more flexible credit score and down payment requirements for hopeful homeowners

But a new model going into effect soon means your credit rating could fluctuate up or down by as much as roughly 20 points, which can make a big difference in the loan amount you’re eligible for and your house-hunting plans this year. 

Let’s delve into more details about credit scores, upcoming changes to the way they’re being calculated, and how this might affect your homebuying goals. 

You’re More Than Just a Number

It’s important for consumers to know and monitor their credit scores on a regular basis. This 3-digit figure is a prediction of your financial behavior and an estimate of your creditworthiness, based on several different factors:

  • Bill-paying history
  • Amount of current debt
  • Number of delinquent accounts or late payments
  • Current loans and credit usage
  • Recent credit inquiries
  • Bankruptcy, foreclosures, or debts sent to collections

The most commonly used credit reporting tool is the FICO score, created in 1989. Many financial institutions, banks, and some lenders (e.g. auto loans) also use VantageScore, which was developed in 2006 by the 3 major credit bureaus, Equifax, Experian, and TransUnion. Both versions issue scores ranging from 300 to 850 and consider your payment history to be the biggest influence on your results.

A lot of potential borrowers worry that having a less-than-perfect report due to medical debt and student loans could keep them from qualifying for a mortgage. But mortgage companies are migrating to advanced credit scoring models that will reduce the weight of these types of debts and give millions of prospective buyers access to better credit and a more secure future.

CNBC reports that 41% of American adults carry debt due to medical bills, according to a study by the Kaiser Family Foundation. As of last July, there’s now a required 1-year waiting period before unpaid medical debt is included in your credit report. This delay was created to help those in the process of appealing rejected health insurance claims and gives people more opportunities to set up affordable payment plans or take care of the debt completely.  

If you’re still faithfully paying your student loans on time, that can actually have some positive effects on your credit score. This gives you a longer credit history and demonstrates your ability to make payments on time. 

If you’re struggling to keep up or have loans in default, the US Department of Education’s Fresh Start Initiative can help you get back on track and closer to buying a home. 

A More Inclusive Market

FICO 10T and VantageScore 4.0 are the new kids on the block and offer much more financial inclusion than legacy credit scoring models. 

The new FICO Score 10T, which is being adopted by many lenders, will not penalize consumers for medical debt that has been paid off or is in the process of being paid off. This will result in millions of Americans seeing their credit score rise by up to 100 points, which could make all the difference in qualifying for a mortgage loan.

VantageScore 4.0 leverages machine learning to deliver a more predictive and equitable score to consumers with a limited credit history or otherwise poorly scored by conventional models. This system will also ensure that mortgage lenders enjoy a lower risk profile as well. 

Another big difference is that now your rent payments can be factored into your report as well. All 3 major credit bureaus will now accept these records, and there are a few ways to submit this information to improve your credit.

One is the Positive Rent Payment pilot program, launched by Fannie Mae in September 2022 to help renters boost their scores. This is a valuable opportunity for households that rent to leverage their good record for a better interest rate on a home loan.

If you’ve got big financial goals for this year — such as buying a home — you may want to make a few simple moves to ensure your credit score is as healthy as possible, such as paying down your debts, raising your credit limits, and utilizing a rent reporting service

The agencies that provide guidelines for conventional mortgages, Freddie Mac and Fannie Mae, are enacting new financing policies, Loan Level Price Adjustments (LLPAs), that will reduce the negative effect of having a lower credit score when applying for a home loan. 

These policies will update the criteria for borrowers and include non-traditional info sources to determine eligibility and hopefully jump-start the housing market in regions where it’s slowed to a trickle. 

Forward Thinking

So, how will these changes in credit score calculations affect you? It depends on your individual situation. If you have medical or student loan debt, you could see a significant improvement in your credit score through these new calculation models. 

If you’re a renter who has made on-time payments, you could see your credit score improve as well. With AI and machine learning driving cutting-edge methods of reporting, more of our community will be able to realize their dreams and become homeowners, which strengthens the community and builds generational wealth. 
Ready to make the first move toward owning your own home? I’m here to help — schedule a consultation to explore your opportunities today!

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