How the New Credit Score Ratings Make It Easier for Home Buyers to Get approved for a Mortgage

For many Americans dreaming of owning a home, it may be soon be much easier to get a home loan, or any type of loan. This could especially be true if their credit scores are in the 500 to 600 FICO score range or if they have little or no credit history.

The change is coming through what is called UltraFICO. This is a new type of credit scoring system that intends to help consumers establish their credit based upon their banking and savings, rather than loans, credit cards and other debts.

According to Freddie Huynh, VP of credit risk at Freedom Financial Network, UltraFICO is an excellent development for credit challenged consumers. He noted recently that when it comes to credit scoring, new data, as long as it is accurate, is great for consumers.

The new scoring system is said to be of most benefit to 7 million consumers who have credit scores in the upper 500s to low 600s on the FICO score range. That is usually just under the minimum credit threshold for getting a variety of loans. It also will help the 15 million or so Americans who do not have a credit score at all. This can happen if you never take out a loan or apply for a credit card.

It also provides consumers with more control of their financial options, says Steve Smith, CEO at Finicity, which is helping to launch the new scoring system. Smith says that this new data is not going to substitute for the regular credit score, but it will empower consumers to contribute their positive data to assist their current scores and to achieve the proper loans for them with more competitive loan terms than they could get before. The UltraFICO score is seen by many to be revolutionary because for the first time, consumers will have a direct role in determining what their credit score is.

How the System Works

The regular FICO score system considers things such as how long accounts have been active, total credit balances and repayment history – all items that are based upon past or current debts and loans. But the UltraFICO system focuses on signs of positive financial behavior. It looks at things such as evidence of regular savings, keeping money in savings, avoiding negative balances and paying bills on a timely basis.

Smith says that UltraFICO also provides better insights into how likely it is that someone will repay.

Regular credit scores are based upon mostly credit card and loan repayment history. They are effective in many cases but can leave off some consumers who were not able to establish a proper credit history. This is an issue that a lot of young people and people of color have. But with new technology and data analysis, we are discovering there are other indicators of a person's ability to repay a loan.

But experts note that UltraFICO and basic FICO scores are not totally different. According to FICO, the UltraFICO system can actually boost a person's basic credit score as well. During the testing phase of the new system, seven out of 10 consumers who saved $400 and had no negative balances for the last 90 days saw their credit scores in FICO increase. Four out of 10 had their scores go up 20 points or more.

In the end, UltraFICO will be optional and it is not offered to everyone. Consumers can opt to participate and will be given the chance to do so if they cannot qualify for a loan with traditional scoring systems. Opting in will let the lender access their banking and savings information and evaluate how financially responsible they are.

Who Should Participate?

The people who are best suited for UltraFICO are people who have low FICO scores in the 500 to 600 FICO range or do not have a score at all. Consumers with good or great credit will not see a major impact. UltraFICO will be of most help to those who are new to the credit system and those who are on the edge of qualifying for a loan. If you have a 750 FICO score, you probably do not need this. But if you have a 685 score and just missed getting a loan, UltraFICO may give you some help. You are giving your lender some extra data points to try to convince them that you are worth the risk to issue the loan.

Experts say that many millennials could see a big benefit from the new scoring system. Many of them had their parents paying for their education and cars and do not need to apply for credit cards until they are in their mid 20s. This is often when they are starting to try to get their own loans but do not have the credit history to do so.

UltraFICO will be tested with a few lenders in early 2019 and will be opened to broader use by summer 2019.

References: https://www.forbes.com/sites/alyyale/2018/11/01/new-credit-score-system-might-make-it-easier-to-get-a-mortgage/#619ffaff5a80