New credit scoring models and disclosures to know aboutby Tim Manni
“Landing a mortgage in 2011 is going to be a bruiser,” writes HSH.com contributing writer Kerry Hannon. “The recession may be over, but mortgage lenders, still feeling the sting of foreclosures, strategic defaults (walk aways) and underwater homeowners are not letting down their guard.”
Revamped scoring models from both FICO and VantageScore are designed to focus more on a borrower’s recent credit history as opposed to their long-term history:
In January, VantageScore, the progressively more popular credit scoring system, delivered its rebooted scoring model, called VantageScore 2.0, to mortgage lenders. This follows on the heels of the rollout in late October 2009 of the revised FICO 8 Mortgage Score by Minneapolis-based FICO, the creator of the ubiquitous FICO score. The two revamped scoring models will place a greater emphasis on borrowers’ short-term credit histories, whereas the models use to place a larger emphasis on a borrower’s credit use over the long term.
The result: High credit scores just got harder to come by. Of course, there are several keys to having a loan greenlighted, including the amount of the down payment that’s available in your bank account (if you’re applying for a mortgage), and your annual earnings that prove you can repay the debt. Perhaps the most important factor that a lender considers when deciding whether to grant you a loan–and at what interest rate–is the seemingly larger-than-life three-digit credit score.
Denied because of your credit?
Beginning on January 1, 2011, if you were denied a home loan because of your credit, new rules regarding how lenders’ must disclose their decisions — based on your credit — are now in place.
Starting in 2011, many credit-seeking consumers will get more information about how their credit report or credit score can impact a lender’s decision to grant credit and the terms under which credit is offered. Beginning January 1, new rules from the Federal Reserve and the Federal Trade Commission require lenders to provide new information to consumers under certain conditions.
Here are three examples of the types of notices you may receive:
- Credit Score Notice. In some cases, shortly after you apply for credit, you will get a notice that states your credit score and information about how your credit score compares to other consumers’ scores. A lender would provide this “credit score notice” to all credit applicants, whether you apply for a mortgage (717 KB PDF), auto loan (611 KB PDF), or another type of credit (611 KB PDF). This notice would be provided regardless of the terms of credit offered to you.If you do not have a credit score, the lender’s notice (565 KB PDF) would identify the particular credit bureau that does not have a credit score available for you.
- Risk-Based Pricing Notice. Not all lenders provide a credit score notice to all credit applicants. Instead, you may receive a “risk-based pricing notice (436 KB PDF)” from your lender. You would only receive this type of notice if you are offered credit on terms that are less favorable than the terms offered to other consumers because of information in your credit report. For example, you may receive this type of notice if you have negative information in your credit report and you are offered a loan with an annual percentage rate (APR) that is higher than the APR offered to other consumers who apply for that loan.
- Account Review Notice. If your APR on an existing credit account is increased based on a review of your credit report, you may receive an “account review notice (421 KB PDF).” For example, some credit card issuers conduct periodic reviews of customers’ credit reports. If there has been a change in your report since you initially applied for the card, the issuer may increase your APR. Under these circumstances, you would receive this notice providing you with the credit report information that resulted in the APR increase.
FICO has created a consumer-friendly website that also takes you through the new changes in credit disclosure.