Looking at trends is useful in just about any field. Whether it’s the latest in fall fashion or the number of times a place-kicker has made a field goal over 50 yards in the past three seasons, analyzing trends can be a great indicator of future performance.
Your mortgage is no different, which is why Fannie Mae has begun analyzing trends in credit on all new applications. The idea is to take a deeper look at applicants’ credit history and how they pay on revolving accounts like credit cards. It’s another among many factors Fannie Mae takes into account when deciding whether to approve you for a mortgage.
In this blog post, we’ll review what’s changing and how it affects those looking to get a mortgage.
How Does Trended Credit Work?
Your credit report shows you and your potential creditors a number of things. These include any credit or loans you’ve applied for in the past, whether you’re keeping up with your payments and how much you pay every month. However, until now, the credit report that the mortgage company gets only deals with that specific point in time. Fannie Mae is starting to look at revolving debt repayment trends going back two years in order to get a better idea of your credit-worthiness.
The change enables Fannie Mae to look at a few things they didn’t take into account in the past. Putting a stronger magnifying glass on your credit history gives them a chance to see these predictors of future behavior:
- If you pay your credit card balances in full each month, you may be considered less of a risk for mortgage financing than someone who carries a balance from month to month.
- Transferring balances without paying them off will make you seem like more of a risk to Fannie Mae.
- The new data will also show whether you infrequently use credit or don’t use it at all as well as whether you’re a seasonal user. This change could benefit clients who only use credit cards when it comes time to buy their children’s Christmas presents, for example.
What Does This Mean if You’re Applying?
Now that you know what’s changing, let’s get to what you’re really here for. What does this mean for you as you’re getting ready to apply for a mortgage?
As mentioned above, this is just one of many factors Fannie Mae uses to determine your mortgage approval status – it’s not the only factor by any means. What this change means is that people who are at risk of not being approved could see this swing the decision in one direction or the other.
Maybe the best way to look at it is with an example.
You have a credit score of 630. The minimum credit score on the conventional loans Fannie Mae backs is 620. You also have 45% of your monthly income that goes toward housing, student loans, car loans and a personal loan. The combination of your credit score and your debt-to-income ratio would make you a borderline client for Fannie Mae.
If you routinely pay off your credit card balances or a substantial portion every month, this could swing the approval decision in your favor under Fannie Mae’s automated underwriting system.
If you have similar characteristics but tend to carry credit card balances forward, you might be denied financing. It’s important to note that some lenders may choose to manually underwrite your loan. Quicken Loans doesn’t do this for Fannie Mae loans.
Just as there are many factors that go into your loan approval, the same is true for your credit score. There are many issues to consider beyond the balances you carry from month to month. This is simply one issue that could affect your mortgage approval going forward.
Has it been a while since you checked your credit? Take a look at QLCredit to see a copy of your credit report and get personalized recommendations on how to improve your score.
Does this discussion of trended credit have your home buying or refinance thoughts trending upward? Go ahead and get a customized mortgage solution through Rocket MortgageSM by Quicken Loans. If you would prefer to get started over the phone, call (888) 728-4702.
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