New Credit Scoring Methods Reduce Bad Credit Mortgage Need
Picture this: You’ve lived in the U.S. for 15 years, earned a decent wage, raised a family, always paid your rent, utilities, cell phone bills and other expenses on time. But you made little or no use of conventional banking and credit systems — avoiding loans, credit cards and debt in general.
Now you go to apply for a mortgage to buy your first home and get smacked with this sobering news: There’s not enough information in your credit bureau files to score your credit.
As a result, you can either be charged an interest rate well above market rates — a 9-10 percent “bad credit home loan” in a 6 1/2 percent market — or you can simply hit the road.
That scenario is precisely what many Latinos — the fastest growing segment of the U.S. population — now face. A poll of 500 members of the 14,000-member National Association of Hispanic Real Estate Professionals found:
- Nearly one-third said their clients end up paying subprime rates on home loans because their limited credit histories make them appear high-risk when lenders use traditional FICO scores, the dominant credit evaluation method in the highly automated mortgage underwriting process.
- Nearly 80 percent said that for every Latino household they help put into a home of their own with a bad credit mortgage, they’re forced to nix two solely because of their bad credit scores.
- Frances Martinez Myers, chair of the Hispanic realty association, estimates that if a mortgage lender uses alternative credit scoring models factoring in rent, utilities and other payments that are not reported to the national credit bureaus, an additional $200 billion in new mortgages could be extended to Latino purchasers.
The credit scoring inadequacy problem extends beyond Latinos. Fair Isaac, developer of the FICO credit score, estimates that as many as 50 million Americans, of all ethnic backgrounds, ages and incomes, are unscorable or difficult to score because they have minimal information on file.
But there is good news: To help borrowers and grow business, many lenders and mortgage brokers are now offering various alternative methods to traditional credit scores.
At the convention of the National Association of Hispanic Real Estate Professionals this month, a new guide was released listing hundreds of mortgage brokers and lenders who use the Anthem system of non-traditional credit reports and scores as supplements to FICOs.
Anthem, developed by First American CREDCO, the credit data subsidiary of Santa Ana-based First American, evaluates whatever information on an applicant may exist in the files of Equifax, Experian and TransUnion.
Then it mixes in information collected by CREDCO from other sources. These include regular child-care payments, telephone, electricity and other bills, current and former rent payments, plus credit data from businesses that do not report to the bureaus — small local retailers that extend credit, payday loan firms, rent-to-own companies and the like.
This produces an alternative credit file that can then be scored. First American CREDCO says its scores better predict borrowers’ risk of future default. Better yet, alternative scoring allows lenders to cut mortgage rates, down payment amounts and fees for people with solid — albeit non-traditional — credit backgrounds.
The Anthem system is just one alternative now available to help applicants. Fair Isaac offers an alternative-data counterpart to its traditional FICO score known as the Expansion score.
Bottom line: Just because there’s not a lot on file about you in the big three credit bureaus no longer means that you can’t obtain a home mortgage on favorable terms. You just need to ask about — or demand — scoring alternatives from a mortgage lender that gives you a better shot.