Home ownership is on the decline and tight credit standards may be to blame so the Federal Housing Authority (FHA) is considering changes to the way credit scores are calculated to help more buyers qualify for home mortgages. This is welcome news for real estate agents and brokers. “Realtors® support safe, responsible access to mortgage credit for borrowers who can show they are ready and able to own a home and keep up with monthly payments,” said Chris Polychron, President, National Association of Realtors® (NAR).
Tight credit standards are preventing many credit-worthy borrowers from qualifying for mortgages. In order for the housing market to fully recover home ownership rates will need to increase. But the FHA is treading cautiously to ensure that those who qualify will be able to afford the mortgage.
So, what is the problem with current credit scoring standards? Today’s credit scoring system places a heavy weight on unpaid medical bills, and missed payments even though the debt has been paid off or otherwise eliminated. This has resulted in many credit-worthy individuals who want to own a home from qualifying for a mortgage they can afford. Also, when NAR analyzed six years of mortgage data (2007-13), it found that African Americans and American Indians had a much higher mortgage loan rejection rate from credit scores than other groups.
Modifying, what many believe is an outdated credit scoring model, to alternate methods which more closely correlates to the savings and buying patterns of society today, could result in a 25-100 point increase in credit scores. “Alternative credit scoring models need to consider these patterns so creditworthy borrowers are not turned away from the American Dream of homeownership,” said Jerry Ascencio, past President, National Association of Hispanic Real Estate Professionals.
Some of the credit scoring models that could be considered include FICO 9 and VantageScore 3.0. These newer alternative methods don’t rely as heavily on unpaid medical bills and blemishes from debt that no longer exists. In addition, it also takes into consideration rental payments to get a more accurate picture of a borrower’s current credit profile. In other words, the newer models place more emphasis on current buying and spending trends and less on historical data.
If alternative credit scoring methods are implemented more Americans will be able to qualify for a home mortgage which would be a big step towards improving home ownership that is necessary for a healthy and sustainable housing market.