Following trends can be useful in a lot of areas. We follow fashion trends to make sure we’re up on the season’s latest styles. Trends in revenues help businesses project growth. Baseball managers have even started using trends to position their defense based on where batters have recently been hitting the ball.
Enter trended credit, a mortgage approval metric being implemented September 24 by Fannie Mae. Trended credit takes a closer look at your history when it comes to paying revolving credit accounts.
This post will take a look at the impact of the new trended credit data if you’re looking to apply for a mortgage. We’ll go over what the change means for applicants.
How Does It Work?
Your credit report currently shows the credit you’ve applied for, if you’re current on payments and how much you pay. However, up to this point, your credit reporting when you apply for a home loan is basically a snapshot in time. During the mortgage approval process, your past credit history isn’t taken into account to give a fuller picture of your overall credit worthiness. That’s now changing.
Trended credit takes into account the following behaviors:
- If you pay your credit card balance in full each month, you may be considered less risky than someone who carries a balance forward.
- If you transfer balances without paying them off, that will be seen as more of a risk by Fannie Mae.
- The formula will also take into account whether you’re a non-user/infrequent user of your cards or use them at a specific time each year. This can benefit clients who previously might not have shown much credit utilization if they only use the card over certain times of the year, like the holidays.
What This Means for Applicants
It’s impossible to know how this will affect the percentage of mortgages that Fannie Mae approves at this point, but here’s what we can tell you.
This is just another factor Fannie Mae uses in order to determine your ability to obtain and keep up with payments on your mortgage. However, if you have certain factors like a borderline credit score and a higher debt-to-income ratio (DTI), this could very well be the tipping point that gets you approved or denied.
If you hurry, you have the same choice when it comes to how your mortgage approval is judged. When Fannie Mae rolls out the new version of their automated approval engine, they still have to support the old version for all loans that started prior to the new version.
This means if you think you might be on the edge with a higher DTI ratio, borderline credit score and you carry a balance – it makes sense to apply before September 24. If you’re not on the tipping point, you can go ahead and apply now if you’re ready. You would likely be approved either way.
Who might benefit from applying earlier? Let’s take a look at a quick real-world scenario.
Let’s say Chris has a 630 credit score. The minimum credit score on a conventional loan from Fannie Mae is 620. He also has a 45% DTI, meaning that 45% of his monthly income goes to paying off debt. These are both factors that put him on the very edge of approval for a Fannie Mae loan. If he also routinely makes the minimum payment on his credit cards, chances are good he would probably be viewed as a more risky client by the new version of the automated underwriting system. Some lenders may choose to manually underwrite Chris’s loan, although Quicken Loans doesn’t do this for Fannie Mae loans.
If you see a lot of yourself in Chris, you may especially benefit from applying before September 24.
If, on the other hand, you have similar stats to Chris, but you always pay off your credit cards or a substantial portion, you can still apply today because odds are good that you’ll get approved. Nothing stops you from trying again after the change goes through either.
Ready to apply? Go ahead and get started here. If you have any other questions, we’ll do our best to get you the answer in the comments below.
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