New changes coming to Fannie Mae's automated underwriting system next month could have prospective home buyers rethinking how they pay their credit card bills. Here's why.
Lenders generally use Fannie Mae's automated underwriting system for every single mortgage loan sold in the secondary mortgage market. This system has always reviewed the mortgage applicant's credit history, credit score, debt-to-income ratio, reserves (a fancy term for savings), and occupancy in order to determine whether they should be approved for the loan.
But, starting June 25, Fannie Mae will use trended credit data to evaluate how applicants paid off their loans over the past two years. And the new data will show not just the loan balance and whether you've made all your payments on time (as traditionally is the case on credit reports), but also the actual payment amount that you made on the account.
This change is designed to reward "transactors," borrowers who pay off their credit card balances in full each month. "Revolvers," conversely, carry a balance, pay the minimum each month, or regularly do balance transfers in an effort pay less interest on their debt. They're generally considered riskier applicants as the more revolving, unpaid monthly obligations you carry, the greater the odds you'll have trouble paying your bills down the line.
For instance, let's say your credit card bill generally ends up around $300 each month. For the transactors, this bill would not be considered a problem as the new data demonstrate they paid their credit card off each month. The revolvers, however, would be unable to show the obligation is paid and, therefore, it would be seen by the lender as a strain on borrowing power to income.
What does this mean for me?
If you are a transactor, you're in good shape for buying or refinancing a home so long as you continue to pay off your credit card while supporting a high credit score as a result. (You can see where your credit currently stands by viewing your two free scores, updated each month, on Credit.com.)
If you are a revolver, you're going to have some choices to make. These choices may include the following.
- Can you buy less house?
- Can you cash-out refinance and pay off the obligations through closing?
- Can you write a check to pay off the consumer obligations, even if the interest rate on them is 0%? (Revolving 0% credit obligations could still limit your ability to qualify for a mortgage.)
- Can you consolidate your credit card debt so you can save on the mortgage and take the monthly savings and prepay the consumer obligations? (Note: You would have to do the math ahead of time to determine if swapping your revolving credit card payments for an installment loan payment would help your debt-to-income ratio and your wallet.)
If you have monthly ongoing credit accounts, you could still be able to get a mortgage, but it's going to add another layer of credit scrutiny that will play a role in your ability to buy a home or refinance one you already own. Simply put, more emphasis will be placed on the full credit, debt, income, and assets. These changes are designed to promote fairness in the area of credit while helping to promote Grade A securities being delivered to Fannie Mae.
If you need guidance as to which debts would have the most impact on your ability to qualify, talk to an experienced mortgage lender who can clearly articulate how your liabilities may affect your ability to borrow.
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