If you want to buy a house, it’s important to have a good credit score. But new underwriting rules from Fannie Mae are throwing some would-be buyers a curve ball. Instead of just looking at your credit score and your credit report to make sure you meet the minimum requirements, Fannie Mae is now incorporating trended credit data into their loan approval process.
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Fannie Mae’s new rules may have a significant impact on who can qualify for a mortgage loan. If you’re in the market to buy a house, here’s what you need to know.
Revolvers vs. Transactors
New underwriting guidelines categorize borrowers as either “revolvers” or “transactors,” based on their credit behavior. Revolvers are people who always pay their credit card bills each month but only make the minimum payment and consistently carry a balance. Transactors, on the other hand, always pay their bills in full.
When it comes to your FICO® credit score, your payment history carries the most weight and accounts for 35% of your overall score. The total amount of debt you owe accounts for 30% of your score. That means that while your debt-to-credit ratio (how much of your available credit line you’re using) is important, your history of making on-time or late payments is going to have a greater impact on your credit score.
What the New Rules Mean for Borrowers
So what difference does trended data make in how your mortgage application is evaluated?The introduction of the transactor and revolver labels means that Fannie Mae is now taking a closer look at your revolving account activity. The move is designed to level the playing field for transactors.
Previously, someone who always paid their credit card balance in full, for example, could’ve been penalized if they used a high percentage of their total credit line at any given point during the month. The transactor might have planned to pay off all of his debt by his next due date. But traditional credit scoring models aren’t designed to take that kind of information into account.
By including trended data in the underwriting process, lenders can get a more accurate sense of how high-risk mortgage applicants actually are.
What Aspiring Homebuyers Should Do Now
If you’re planning on getting a conventional mortgage loan, it’s a good idea to add paying down your revolving accounts (read: credit cards) to the top of your to-do list. Fannie Mae’s new rules reward transactors (folks who pay off their credit cards in full every month). If you’re currently a revolver because you’re only making the minimum payment, it’s important to wipe out as much of your credit card debt as possible.
Homebuyers who can’t eliminate all of their revolving debt at one time can consider consolidating their debt by getting a personal loan. If you can consolidate the debt from multiple credit cards into a single loan, you can potentially get rid of your debt more quickly and save a ton of money on interest. Just keep in mind that you’ll need to shop around for the best deal on a personal loan before pulling the trigger.
If you’re stuck paying a higher interest rate or a hefty loan origination fee, consolidating your debt might actually cost you more money in the long run. And don’t forget that taking on a new loan will likely affect your credit score. New credit inquiries can knock points off your score, so if you’re contemplating consolidation, it’s best to do it before you apply for a mortgage.
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