Credit Card Balance and Mortgage Will Financially Impact You in the Future

credit-card-mortgage

Ever since the housing crisis, the rules of mortgage approval have become more strict.

Fannie Mae has created a new set of regulations regarding the methods on how to pay credit cards.

Basically, having a credit balance will impact your chance to acquire a loan.

In June 25, Fannie Mae (Federal National Mortgage Association) has released a new set of rules for their policies in mortgage underwriting process.

Trended credit data is one of its major improvements, which can be a disadvantage if you do not pay your balances each month.

To put it simply, you are in a good place as long as you pay the whole amount of your credit balances on a monthly basis.

You are identified as a risk if you’ve got a revolving balance, which could hinder your chance of obtaining a loan.

It also depends on the amount of debt you are revolving.

Forbes describes that the explanation for this change is a blind spot that exists in the way usage impacts the credit scores.

Find out more about the complete press release of Fannie Mae below.

It provides explanation to every single change that comes with these new regulations.

If you are really interested in house buying, then make sure you fully understand how your credit rating can have an effect on the process of mortgage.

Press Release:

Desktop Originator/Desktop Underwriter Release Notes DU Version 10.0

The new version is noteworthy as it involves the importance of using trended credit data in the case of underwriting single-family applicants.

FNMA is working together with TransUnion and Equifax to provide the right information.

At the present time, the credit report intended for mortgage lending only show the outstanding balance of the borrower.

It also indicates if a borrower is often late or always on time when paying existing credit balances including mortgages, student loans or credit cards.

Lenders have access to the consumer’s monthly payment amounts by means of trended data.

This trended credit data only provides revolving credit card balances, and not the other debt payments of the consumer like mortgages or education loans.

The trended credit data includes the the actual payment amount, the minimum payment due as well as the monthly balance, which are all available to the loan companies.

Fannie Mae explains how trended credit data works best for consumers.

For instance, if two borrowers have the same credit scores, paying on time and have $20,000 credit debt, the FNMA software will prefer the borrower who had a credit debt of $30,000 five months ago and have already paid half of it, compared to the borrower who had a debt of $2,000 five months ago, but add up an additional $5,000 and paying minimum amounts on-time.

Over time, Fannie Mae has identified those borrowers who pay their credit cards every end of the month are 60% less inclined to be behind on their loan than those consumers who only make minimum payments, even though they are done on time.

The move could help newer debtors with lower FICO scores due to a shorter credit rating, but are responsible in paying their debts on time.

Actually, it is considered to be better as opposed to having a higher credit score and longer credit file, but loading up account balances and using their credit limits.

Fannie Mae’s product manager, Mindy Armstrong, stated that  credit cards are not a bad thing, as long as you know how to use them accordingly.

In simple terms, the Desktop Underwriter (DU) gains access to all the payment history and patterns of a debtor.

It basically views those people who pay their balances in full or give large payments monthly more favorably, compared to those with similar monthly balance who only gives minimum payment.

Fannie Mae predicts that approximately 300,000 more consumers could be eligible for using trended data rather than underwriting credit minus it.

How to Prepare

When applying for your new mortgage, pay your credit card debt every month as much as possible in order to acquire the best mortgage rates.

If you can, pay your balances in full.

If you cannot afford to pay the whole amount of your accounts, then first pay the ones with the highest rates of interest and make sure to pay on time.

What is Trended Credit Data?

In the same way that fashion styles come and go, so does your credit history. Your payment patterns and balances also change with time.

Trended data gives information about previous payments, account balances, and the actual monthly payments done.

It provides more information, in which a credit report did not indicate before.

In the past, before the introduction of trended data, lenders didn’t have any idea what are the credit balances in the past month when they look at a credit card report.

Now with trended data, lenders can tell things including the following:

  • How much monthly balance was previously.
  • The amount of payment required was per month.
  • The actual amount paid in connection with the required payment.
  • The amount of spent on a monthly basis.
  • How the credit score is changing as time passes.

So, take a look at your situation; are you paying your debts on time or it has been accumulating as of late?

If you do not have copies of the past credit card histories, not one of them was available in the past.

Remember though that not all lenders are going to use trended data.

In that case, only the accounts that give this kind of information will be visible on the credit profile.

When will Fannie Mae require trended data for loans underwritten via Desktop Underwriter?

A: The credit history submitted for the 10.0 Version loan casefile should be the version of the credit score report that supports the use of trended data.

If the specific credit report DU version is not given, you get an error indicating that the version it has received is not supported by the latest version.

You need to contact the technical support team of the credit card agency to make sure the right version is made available.

How will the amount paid on the credit account indicate how a borrower is able to pay the mortgage?

A: The trended credit data is used by the Desktop Underwriter risk assessment to determine how a debtor handles his revolving accounts.

A lower risk consumer is someone who uses his revolving accounts carefully conservatively, which means low revolving credit usage and consistent payment of revolving account.

In contrast, a higher risk borrower is someone whose uses high revolving credit and makes only a minimum payment per month.

Does trended data affect the credit ratings returned on the report?

A: The answer is No. The traditional credit report versions do not use trended credit data, hence they are not affected with its inclusion to the credit rating.

These older versions of the credit scores will still be the ones accepted by FNMA.

Do all credit databases use trended data?

A: Equifax and Transunion provide trended credit data. Currently, it is still not available from Experian, and there is no specific time when or if they are going to use it.

How Does Trended Credit Data Assess a Borrower?

This new version shows how a borrower handles their credit cards.

Again, an individual who uses revolving balances cautiously is viewed as a lower risk, having a high possibility of approval.

Being cautious means utilizing just a lesser percentage of the credit line and trying to make payments every month fast.

On the other hand, if a person has a higher balance than the credit limit and make the minimum payments per month, is considered a high risk debtor.

For example, in the past, you were laid off from work and got some financial debt, but you have been actively paying your debts ever since that time.

It would appear on your credit file and would be favorable to your approval.

However, if you have been increasing your debts on your credit cards throughout the past year and paying off the minimums, chances are it would harm your approval.

Take a Look at a Comparison Case Pre and Post Trended Credit Data:

A buyer (John) owns four credit cards, each with $7000 credit limits, and each has $6800 balances as well.

During the past year, this person holds the same balance. Soon after, he plans to buy a property, pays his credit cards $800 each and then borrows money from a friend.

One month after, the lender evaluates his credit score and what is shown is the consumer has $800 balances on every credit card.

The Results: Nick is a good credit risk considering that the lender only sees that John pays his debts on time Nick carries a lower balance than the current limit.

Therefore, John is a good credit risk since the lender can only see his existing balance.

During pre-trended date, the creditors could only see the recent balance of the borrower instead of seeing the entire balance history.

The good news is, we have trended credit data now.

We would find out that John has been at his maximum for a year already, has been paying the minimum, and then dramatically paid his credit cards just a month ago.

Upon seeing this information, a lender would definitely ask, where did John got the money to buy a new home. John’s answer would be that a good friend lent him money.

This could possibly be a problem to the mortgage loan given that he borrowed money from another person.

Now you understand why it is really a vital information, which could be favorable or a problem to the borrower based on the overall usage of the credit.
Just remember that although the credit lenders and bureaus evaluate more data today, it does not have an effect on the actual credit ratings of the borrowers.

They calculate credit scores exactly the same way as they were.

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ratetake

Martin - Head of Real Estate and Finance at RateTake
Martin is Head of Real Estate and Finance division at RateTake. He creates content that helps people understand and make the right decisions for their financial future.
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ratetake

Martin is Head of Real Estate and Finance division at RateTake. He creates content that helps people understand and make the right decisions for their financial future.