Trended Credit Data; a New Credit Analysis system for Conventional Home Loans
Being able to forecast whether or not a homebuyer will pay his or her mortgage loan on time is the key notion behind credit scoring. The Fannie Mae announcement about trended data being added to mortgage credit reports for the underwriting process is causing a modification in the entire industry and will change the way home buyers are viewed by the underwriting system.
This is a huge deal and is going to cause a shift in the mortgage lending world.
Fannie Mae has defined trended data as follows: “An enhanced credit report with new, valuable data fields, including Actual Payment Amount, and up to 30 months of detailed account history for each trade line.”
The way credit reports show information now is in a snap-shot format. Basically, when a report is pulled, the current balance, last payment, and minimum payment show up on the report. This scenario does nothing to account for the people who charge on their credit cards all month and then pay the balance in full.
This data allows a smarter, more thorough analysis of the borrower’s credit history. Currently, as we mentioned above, credit reports used in mortgage lending only indicate the outstanding balance and if a borrower has been on time or delinquent on existing credit accounts.
Home buyers must learn to become Better Credit Managers
Lenders will have access to the monthly payment amounts that a consumer has made on these accounts over time with trended credit data. Among other benefits, this will allow lenders to determine if the borrower tends to pay off revolving credit lines, such as credit cards each month, or if the borrower tends to carry a balance from month-to-month while making minimum or other payments.
By understanding the borrower’s payment trends, the underwriting process can be more predictive of who is prepared for a mortgage loan. For example, with all other aspects of the loan being equal, research has shown that borrowers who pay off their credit cards every month are 60 percent less likely to become delinquent than borrowers who only make minimum payments each month.
Desktop Underwriter will be updated to utilize this trended credit data, and Fannie Mae will provide additional guidance to lenders in the coming months. Trended credit data will give lenders information on borrowers for items like the following:
The Final Word
The new underwriting standards will be implemented in September 2016. The new standards will apply to new case files submitted to Fannie Mae after the weekend of September 24, 2016. The ability for lenders to qualify borrowers for mortgages based on trended credit data means that borrowers who continuously reduce their debts my making large payments or paying off debts every month will be able to get more favorable rates when shopping for a mortgage loan.
Borrowers who carry a balance, tend to pay debt off slowly and make relatively small monthly pay-ments will find it more difficult to get the low rates they have been accustomed to getting. Many of these borrowers consider themselves excellent candidates because they show a long payment history without defaulting on payments. However, lenders and secondary investors will increasingly see this behavior differently.