A change in how some credit scores are calculated might soon make it easier for some homebuyers and homeowners to get a mortgage.
The change is limited to a new type of score known as the FICO Score 9. This score is calculated by FICO, the San Jose, California-based company that created the FICO score.
FICO Score 9 eases up on medical debts
The new score offers what the company characterized as "a more nuanced way" to assess debt collection related to medical bills by differentiating medical from non-medical collection agency accounts.
"This will help ensure that medical collections have a lower impact on the score, commensurate with the credit risk they represent," FICO explained in a statement. "The median FICO Score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points."
The new score "uses a more refined treatment of consumers with a limited credit history and those with accounts at collection agencies,” said Jim Wehmann, executive vice president for Scores at FICO.
FICO Score 9 has credit score consistency
“FICO Score 9 will also be the most consistent FICO Score across all three credit bureaus,” said FICO. The three U.S. credit bureaus are Experian, TransUnion and Equifax.
“U.S. lenders can more consistently and precisely assess new applicants and existing accounts with a more robust credit score built on the most current credit data available, while minimizing operational hurdles associated with adoption and compliance,” said Wehmann.
“This move will ultimately make a real difference in the lives of millions of Americans, who have been shut out of the housing market or forced to pay higher mortgage interest rates because of flawed credit scores,” said Steve Brown, president of the National Association of Realtors. “Since the housing crash, overly restrictive lending has been the greatest obstacle to homeownership.”
How do credit scores affect mortgage rates?
To qualify for the lowest mortgage rates, borrowers must have a FICO score above 740. But for mortgage borrowers who fall outside this top-flight range, especially those with past medical events, the potential for a 20- to 25-point improvement can have a substantial impact on your borrowing costs.
Keith Gumbinger, vice president of HSH.com, provided this example in an issue of HSH.com’s MarketTrends newsletter:
A borrower today with a FICO score in the 660 to 679 range and a 10 percent down payment would have to pay a fee of 2.25 percent to get access to today's best mortgage rates (about 4.125 percent for a conforming 30-year fixed-rate mortgage give or take a little). Since that fee might be hard to pay out of pocket, many borrowers decide to incorporate that fee into the interest rate, which would then climb to perhaps 4.625 percent without the fee. But if the borrower had a credit score of 680 to 699, and that same borrower would see a fee of only 1.25 percent and a corresponding fee-included rate of 4.375 percent or so.
Can the FICO Score 9 help me?
While Brown asserts that the upcoming FICO changes will have a profound impact, affecting “millions” of Americans, it is important to remember that the changes target borrowers who suffered a major medical event, thus not directly impacting the majority of mortgage borrowers, says Gumbinger.
Furthermore, not all lenders will use the new FICO score. Some mortgage lenders will continue to use earlier versions of the FICO score or other types of credit scores.
Lenders will be able to get the new score through the U.S. credit reporting agencies later this year.
Related credit score articles:
- Can I get a mortgage with a FICO score of 600?
- Can I do a cash-out refinance with a low credit score?
- 8 ways to raise your credit score
