Current credit scoring methods use strict criteria for judging creditworthiness but often fail to account for factors that might indicate good overall money management skills. Fortunately, a new bill introduced in December 2015 may change that. Known as the Credit Score Competition Act, or H.R. 4211, this bill is still in the very first stages of the legislative process. According to real estate brokers in Downtown San Diego, if passed it could have a significant and very positive impact on first-time homebuyers who are having a hard time qualifying for conventional mortgage loans.
What Lenders Aren’t Seeing
Certain factors that aren’t currently accounted for in a person’s financial profile such as timely rent payments and a preference for using cash could increase the likelihood of funding approvals once lenders move away from the FICO-only scoring system. Without a long-running credit history, many consumers are assumed incapable of managing the debt load that a mortgage loan would entail. H.R. 4211 is designed to show that this may not necessarily be the case. Under the current credit-scoring model, prospective buyers are often denied funding for having short or limited credit histories. FICO is simply not structured to account for diligent savings plans, responsible bill payments and good overall debt management if people aren’t regularly using credit to finance their lifestyles. Should the Credit Score Competition Act Pass, people will have a greater chance of qualifying for funding in spite of limited credit use.
An All-New Credit Scoring System
This bipartisan bill will make it necessary for mortgage institutions that are government-backed, such as Freddie Mac and Fannie Mae, to only use credit scores as part of the underwriting process in limited and specific situations. Moreover, these institutions will have to maintain transparency concerning the process by which credit scores are both validated and approved. This will force them to consider other factors beyond applicants’ FICO scores and take a well-rounded view of individual spending, savings, and money management habits.
Increased Accessed to Essential Funding
These changes would provide a marked increase in access to essential funding for many people who are not able to achieve excellent FICO ratings. Lenders would evaluate these individuals via different credit scoring models. This would increase the likelihood of funding for buyers who might otherwise miss out. Given that nearly 90 percent of the secondary mortgage market is owned by government-backed lenders and these lenders are only able to consider FICO scores, the credit scoring industry currently lacks competition. This lack of competition has both stifled innovation and ostracized a number of potential homebuyers. With the Credit Competition Act looming on the horizon, consumers may soon have access to a system that can more efficiently gauge financial competency.
If you’re interested in learning more, or are considering buying a loft, penthouse, or condo for sale in Downtown San Diego, give us a call at (619) 649-0368. We look forward to hearing you! ')}