FICO Credit Score Changes and Mortgages

If you are considering a move and will be applying for a mortgage, you may be biting your nails wondering what your FICO (Fair Isaac Corp.) score means for your ability to borrow. Your credit score determines if you are given preferred interest rates, will have to pay more due to missed payments or a high debt to income ratio, or are able to qualify for a loan at all. The FICO credit score ranges between 300-850 and weighs payment history, amounts owed, length of credit history, new credit, and types of credit used according to myFICO.com.

Shockingly, one-third of Americans struggle to pay their medical bills each month and medical is the number one leading cause of bankruptcy in this country according to Forbes. Medical bills have affected the credit scores of millions. In fact, Forbes indicates 64 million Experian credit bureau consumers have medical collection on their credit report which impacts their credit score and their ability to get a loan. According to Anthony Sprauve, FICO’s director of public relations, 50% of all unpaid collection debt is medical debt.

Under the new FICO 9 credit scoring formula which is set to be implemented this fall, the impact of medical debt will be reduced and the average credit score will increase a median 25 points per person with medical debt but who are otherwise financially responsible with their bills. Additionally, medical debt that has been paid in full will not affect the credit score negatively at all.

The rationale for this change is that having one-time medical debt is much different than chronic credit card debt. However, more than 11 million Americans use credit cards to take care of medical debt each year. Under the new FICO rules, doing that would hurt their credit more than if they made a payment plan directly with the medical facility or medical collection agency.

Another change in the FICO scoring model is that past, closed debt associated with collection companies will also have a lesser-impact.

Steve Brown, President of the National Association of REALTORS®, welcomed the change, indicating it will “make a real difference in the lives of millions of Americans, who have been shut out of the housing market or forced to pay higher mortgage interest rates…since the housing crash, overly restrictive lending has been the greatest obstacle to homeownership.”

FICO 9 will change the credit scores of many.  While these changes seem like a step in the right direction, Fannie Mae, Freddie Mac, and a host of other lenders are still using older FICO scoring methods and have been slow to adopt changes in credit-scoring conventions. Therefore, although you may benefit from a better credit score under the new FICO 9 formula, your lender may or may not take the new formula into consideration when you apply for a loan. Additionally, some lenders already discount medical debt when determining someone’s creditworthiness.

If you have questions or concerns about your credit score, the time to talk with a financial professional who can get you on the right track to homeownership is now. I have lenders I can refer you to. Please give me a call: (206) 790-0081 or send an email to jamie@jamieflaxman.com.

Sources:

http://www.realtor.org/news-releases/2014/08/new-credit-scoring-calculation-will-improve-access-to-homeownership-say-realtors

http://www.forbes.com/sites/christinalamontagne/2014/08/26/medical-debts-will-soon-weigh-less-on-your-credit-score-but-theyre-still-a-problem/

http://www.housingwire.com/blogs/1-rewired/post/31236-adopting-fico-9-could-increase-first-time-homeownership

http://www.foxbusiness.com/personal-finance/2014/09/10/what-fico-new-credit-score-formula-means-for-home-buyers/

http://www.myfico.com/crediteducation/whatsinyourscore.aspx

 

 

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