The latest amendments in the home loan approval process by Fannie Mae will be effective starting 25 June, 2016. The new system of ‘trended credit data’, including several other changes, will enable the mortgage technology to consider first time home buyers and customers who do not have a credit history.
For the last 25 years, financial institutions have been lending out through an automated process, wherein the lending institutions put in all the information collected from borrowers into an underwriting system that, in most cases, is connected to Freddie Mac or Fannie Mae. Factors considered during the underwriting process include the amount of mortgage loan applied for in contrast to the value of the home, the debt-to-income ratio of the borrower, his/her assets and borrower’s credit history. The loan origination software generates a report stating the credit worthiness, associated risks and eligibility criteria.
On the other hand, the new system of trended credit data will analyze how a prospective borrower, over the last 24 months, has been paying the balances of his/her credit card. To do this, Fannie will go through customers’ account balance, scheduled and actual payments made by them to understand the kind of risk they carry. It is more than likely that potential home buyers whose accounts show a trend of payments higher than the minimum amount due, or regular payment of credit card dues will get quick approval for home mortgage loans.
Lending organizations will agree that this criterion will definitely prove rewarding for first time home buyers. Interest rate on the mortgage loans will, however, continue to depend on the credit score of each customer. That said, the new system does away with the belief that customers who do not have a mortgage carry higher degree of risk than those with existing mortgage.
Another major change the new system will bring in is automated underwriting instead of manual approvals. The change will target home buyers who have no credit score. This, however, will require strict adherence to a number of guidelines. Lending institutions will have to obtain proofs stating the credit history of potential borrowers through two non-traditional sources. One will be a 12-month payment history of tuition, utilities, auto, life insurance premiums, cellphone bills, or child-care cost and the second will be a payment history of the rental house. Borrowers with no credit history will essentially involve millennials who can produce proofs of payments made on time in the past year.
Fannie Mae’s amendment will definitely be beneficial for the lending institutions. There will be expansion of the consumer base as the loan origination software will automate the process for more and more no-credit-score customers.
Reports say that Freddie Mac has, however, no plans of making any changes to accommodate the new system of trended credit data in its current underwriting system. Though, it will invest in a mortgage technology that will keep the system under check.