For years the FICO credit score has been used by lenders to determine the creditworthiness of borrowers on loan applications. The Fair Isaac Corporation established the FICO score model. They use a mathematical model to give a score on a credit report. A number of factors become the basis for this score such as length of credit history, timeliness of payments and amount of utilized credit. Recently they’ve announced that they are coming out with a new model to calculate credit scores. What are these changes and how do they affect your mortgage application process?
FICO Credit Score Changes
The changes in the new FICO Score 9 model largely focus around collections. According to the Fair Isaac Corporation, the goal on the new scoring model is to more accurately portray the credit risk of borrowers. The new model shows the likelihood of a loan applicant’s ability to repay a loan. It also allows lenders to make more confident lending decisions.
Paid off collections will no longer affect credit scores
FICO has states that a paid collection should not affect a consumer’s credit score. They feel that once the collection has been paid it lowers the level of risk. Therefore once you pay the collection in full it will no longer negatively impact a consumer’s credit report and reflects as paid.
Medical collections will not severely impact scores
FICO feels that a medical collection does not directly imply the credit risk of a consumer. Medical collections are often from a dispute between medical providers and insurance companies or a result of a medical emergency. This does not mean that a consumer has a lower ability to repay a loan or financial irresponsibility because of these circumstances.
Better assess reports with limited credit history
Consumers with thin credit files will no longer be punished for their lack of using credit. The new score model intends to develop a score based on the repayment history of whatever credit they did have.
Mortgage Applications
In the first place, many are questioning whether or not the changes in the new FICO score will actually affect mortgage applications. The new FICO credit score model will only impact applications if mortgage lenders choose to utilize it while determining creditworthiness. Many lenders are hesitant to use the new model. This is because it is costly to restructure the underwriting systems currently in place.
The federal government mortgage programs, Fannie Mae and Freddie Mac, have announced that they will not be using the new FICO model. Since these organization back most conventional home loans most mortgage applicants will not feel any difference with these changes to the new FICO score.