New Credit Scoring System = Easier Mortgage Approvals in 2019
The new scoring system is heralded as a game changer, meant to ease the mortgage approval process & help more “good people” qualify. All we can do is wait & see…
New Credit Score System Might Make It Easier to Get A Mortgage
Aly J. Yale, Contributor
For millions of Americans, it might soon be easier to get a mortgage loan — or any type of loan, for that matter — especially if they fall in the 500 to 600 FICO score range or have little to no credit history at all.
The change comes by way of the UltraFICO — a new type of credit scoring system that aims to help consumers establish credit based on banking and savings activity, rather than credit cards, loans and other debts.
Freddie Huynh, vice president of credit risk at Freedom Financial Network, called UltraFICO “a great development for consumers.”
“When it comes to credit scoring, new data, as long as it is accurate data, is good for consumers,” Huynh said.
The new score is said to most benefit the 7 million consumers who fall into the upper 500 to low 600 FICO score range — usually just under a lender’s minimum credit threshold. It should also help the 15 million Americans who have no credit score at all (due to never taking out a loan, applying for a credit card, etc.)
It also gives consumers more control of their financial options, according to Steve Smith, CEO at Finicity — which is helping to launch the new score.
“While this data will not substitute for the traditional credit score, it empowers consumers to contribute their positive data to help boost their current scores and achieve the right loans with more competitive terms than before,” Smith said. “The UltraFICO score is revolutionary because, for the first time ever, consumers will play a direct role in determining their own credit scores.”
How Does it Work?
While the traditional FICO score considers things like length of accounts, total credit balances and repayment history — all items based in previous debts or loans — the UltraFICO instead focuses on signs of “positive financial behavior.” It takes into account things like evidence of consistent savings, keeping healthy banks balances, avoiding negative balances and regularly paying bills on time.
According to Smith, the UltraFICO provides deeper insights into how likely someone is to repay.
“Traditional credit scores are determined based on a few different factors, mainly credit card and loan repayment history,” Smith said. “They are effective enough in many cases but leave off consumers who have not been able to establish a sufficient credit history — an issue that many young people and minorities deal with. However, with new advancements in technology and data analysis, we’re finding that there are other indicators of a person’s likelihood and willingness to repay a loan.”
But the UltraFICO and basic FICO scores aren’t completely disparate. According to FICO, the UltraFICO can actually improve a person’s basic score, too. During testing phases of the new scoring system, seven out of 10 consumers who saved $400 and had no negative balances for the past three months saw their basic FICO score jump after opting into the system. Four out of 10 had their scores jump 20 points or more.
Ultimately, the UltraFICO score will be optional — and it won’t be offered to everyone. Consumers can opt in and will be given the choice to do so when they can’t be qualified by more traditional scoring systems. Opting in will allow the lender to access their banking and savings data and evaluate their overall financial responsibility.
“The best way to improve credit scores powered by credit bureau information is to source new data sources,” Huynh said. “Leveraging the banking information volunteered by consumers is a logical and effective way to improve credit scores. One of the reasons why I am bullish on this development is that real improvement can only be realized by data that is orthogonal — that is, it captures new information that isn’t found in traditional sources like credit reports.”
Who Should Opt In?
The sweet spot for UltraFICO is consumers in the 500 to 600 traditional FICO range and those who don’t have any credit score at all. Consumers with good to great credit? It’s not going to have much of an impact, according to Matt Schulz, chief industry analyst at CompareCards.
“UltraFICO will be most helpful to those new to credit and to those right on the edge of qualifying for a loan,” Schulz said. “If you have a 750 credit score, you probably won’t need to bother with this. However, if you have a 695 score and just barely miss out on getting a loan, UltraFICO can, in theory, give you a second chance. You’re basically providing your lender a few extra data points to try to convince them that you’re worthy of receiving that loan.”
Millennials, many of whom haven’t had much opportunity to build credit, could see particular benefit from the new score, according to Smith.
“Often, their parents paid for their schooling and cars, and they don’t apply for credit cards until they reach adulthood,” Smith said. “This is often the same time they transition to taking out their own loans but find themselves ineligible due to a lack of previously established credit. In this situation, being able to show that they have their own savings accounts, regularly pay their rent and manage their checking account well could be the difference in enabling them to obtain a mortgage.”
But if those Millennials are freelancers, gig workers and anyone with inconsistent cash flow? They might want to think again. According to Tendayi Kapfidze, the new system could actually be “detrimental” to these consumers.
“Gig workers can have a traditional credit file just like anyone else,” Kapfidze said. “They could be at a disadvantage under this system due to their irregular cash flows.”
Schulz said that under the UltraFICO system, these inconsistent balances could cause lenders to see them as a bigger risk, ultimately hurting their chances at getting a loan.
The UltraFICO score will be tested by a select handful of lenders in early 2019 and will open up for wider use by summer.