New FICO Score model: 3 things you may not know
Before prospective home buyers get too wrapped up in last week’s news of changes to FICO Score calculations that are expected to raise some consumers’ scores, here are three things to keep in mind:don’t let credit score information prevent you from seeking a mortgage. Not so big. Fair Isaac Corp. in announcing the changes estimated that a consumer with an average FICO Score of 711 and an overdue medical bill as the only significant negative on a credit report could get a lift of 25 points. For general information, consumers can plug in a loan type, mortgage size and credit score on myFICO’s Loan Savings Calculator to see how a change in their FICO Score might affect the interest rate on a mortgage. Using the myFICO calculator, you’ll see a 25-point increase in a credit score doesn’t have a huge impact on a person’s mortgage interest rate. That said, a higher credit score is always a positive – although, as I said at the beginning, credit scores are not the only factor lenders use to evaluate a loan application. Not so fast. Credit score maven John Ulzheimer points out in his Credit Sesame Daily blog that government-sponsored entities Fannie Mae and Freddie Mac, which acquire and securitize mortgages from most large lenders, determine what credit scoring software versions can be used for their underwriting purposes. Today, Fannie and Freddie mortgage loans are underwritten using FICO scoring software that is one generation behind the most current version. When the new scoring model known as FICO Score 9 becomes available Fannie and Freddie will be two generations behind, Ulzheimer says. Consumers who could benefit from the new FICO Score calculation will likely not get the benefits for a mortgage loan application until Fannie and Freddie adopt FICO Score 9 for their underwriting purposes.
The changes to FICO scoring may help lift some consumers’ credit scores. There are three elements of the new calculations: (1) They will not include negative marks for accounts that went to a collection agency but were subsequently paid off, (2) they will differentiate medical from non-medical collection agency accounts; and (3) they will better assess the ability to repay of consumers with limited or non-traditional credit histories.