Fannie Mae Changes Mortgage Underwriting Software; May Affect How Loans Are Approved
The government-backed loan agency, which provides loans to over a quarter of mortgage applicants across the nation, has changed its risk assessment software that will factor in other details on how borrowers are paying their debts off.
In the past, the credit report Fannie Mae and most lenders used would show much how available credit you were using and if you were making on-time monthly payments. However, the latest software from Fannie – the Desktop Underwriter software – takes how you’ve been paying your bills for the last two years. Are you only making the minimum amounts on your payments each month? Are you paying them off fully? Or, do you make more than the minimum but still have a balance on the card?
According to Fannie Mae officials, the new information, which is known as trended credit data, can assist lenders to determine just how good people are managing their debt and how they’ll do with their mortgage payments.
Center for Urban Business Entrepreneurship at Brooklyn Law School Research Director David Reiss said the underwriting model would give weight to the way in which people pay their credit card debt off. He said it’s not known how tuned the system is going to be, but it’s certainly a “granular” method to debt repayment.
At the moment, credit score measures such as the FICO score are not used in the information, which means people won’t get hit with a hard inquiry.
The application, however, could be affected in a big way.
Reiss said if two people have the same credit profile but one makes the minimum amount, and the other pays their entire balance, the person who pays off their balance is regarded as a lower risk. This person has a higher chance of being approved for their home mortgage.
People who pay even slightly more than the minimum amount increases their chances of being approved for a loan.
Michael Rosenbaum, CrossCountry Mortgage loan officer, said it’s not clear what kind of impact this will have on the mortgage scoring and what automated underwriting has on payment history, but anybody who pays 30% or more on their monthly balances are going see an improvement.
Rosenbaum said people who pay their credit card debt off each month are 60% less likely to be delinquent on their payments than people who make the minimum amount.
Still, if people can only afford their monthly minimums, they’re not completely out of luck.
According to SparkRental.com Education Director G. Brian Davis, loan pricing is based on credit cards, which means the new information isn’t going to affect interest rates just yet. If it works, more lenders will start altering their rates to use the extra credit card history data.