Get ready for a new credit score — UltraFICO is coming. Experian and Fair Isaac Corporation have created a new credit scoring methodology. Although mortgage guidelines will likely be slow to adopt this credit enhancement, there is another innovation homebuyers can take advantage of today.
A credit score based on more than credit
If you have trouble qualifying for a loan due to limited credit or marginal credit scores, UltraFICO offers a possible second chance. It expands the data included in a credit score to include your bank balances and transaction history for a bigger picture view of your financial behavior.
Enhanced scores with bank activity
With your permission, Experian will access banking activity from your checking, savings and money market accounts. Your balance and transaction history provide additional data that could generate a score where none existed before or boost the score you get using the traditional method.
Fair Isaac predicts that 70% of consumers with an average savings balance of $400 and no overdrafts in the prior 3 months will see an increase to their score and 15 million consumers who have no traditional score could receive an UltraFICO score.
A leg up if you need it
If you already have an established credit history and good credit scores, UltraFICO won’t be of value — and you don’t need it. You’ve already got a great score, after all. But if you are just starting building credit or getting back on your feet after a rough patch, a bigger-picture view of your financial activity, UltraFICO could be beneficial.
Factors included in your UltraFICO score are the length your accounts have been open, consistently maintaining a positive balance (higher the better), no negative balances and regularly paying bills and making other banking activity. The UltraFICO score will only work if you maintain an average balance of $400 or more.
If you use a service like Mint, the interface and process will look familiar: create your account, enter your bank’s name and login credentials — done. The technology behind the UltraFICO score comes from a partnership with Finicity, the same company Fannie Mae uses for digital asset verification for mortgage underwriting.
Mortgage ETA is TBD
Testing of the new system will begin in early 2019, but so far Fannie Mae and Freddie Mac have not indicated a date they’ll adopt UltraFICO enhanced scores… and don’t hold your breath. The agencies are always slow to move from tried and true methods of underwriting mortgages.
Current options with limited credit
If you have limited or no credit, there are underwriting guidelines that give the option to build a “non-traditional” credit report, using things such as your payment history on rent, utilities and insurance premiums to demonstrate your creditworthiness. A non-traditional credit history must be developed manually with letters of credit, bank records, canceled checks or paid bills showing 12 months of timely payments.
Also, non-traditional credit is only permitted to supplement a thin credit record or when no traditional credit exists. Non-traditional credit can’t be used to offset a poor credit or derogatory accounts.
If you have no credit score and use non-traditional credit to qualify for a loan your score is presumed to be 620. A 620 credit score, means you’ll pay a higher interest rate, higher closing costs or both.
Rent-reporting to the rescue
Your prior housing payment history is one of the best indicators a lender can use to predict how your pay a new mortgage. And your payments on debts with fixed monthly payment and term, like a lease, are heavily weighted in traditional credit score calculations.
Yet, only a tiny fraction of landlords report rent history to the credit bureaus. I see hundreds of credit reports a year and only see rent history on two or three reports.
So how do you get your rent payment history to show up on your credit report? A number of companies are able to help you get your rent payment history sent to the credit bureaus to help you build credit and improve your credit score.
A few of these are ClearNow, eRentPayment, PayYourRent, Pinch, Rental Kharma, Rentler, Rent Track, Rent Reporters and Cozy (Cozy is right here in my hometown of Portland… not that I’m playing favorites or anything).
Questions for rent reporting services
Before you decide to hire a rent reporting company, be sure and ask some key questions:
• What are their fees?
• Do they require your landlord to participate?
• To which credit bureau(s) do they report?
• At what intervals do they report?
• Can they add your rent history to your credit file or do they just report as you pay?
For mortgage qualifying purposes, it’s especially important to make sure the service or services you hire report to at least two of the three credit bureaus (Equifax, Experian, TransUnion). Mortgage lenders use the lower of two scores or the middle of three scores when qualifying you for a loan — and most loans require that you have at least two scores.
And although services that verify and report prior rent payment history tend to cost more, the “instant history” they create can make a huge difference in your score.
Let us help!
Building or improving your credit score can take some time. Planning ahead for changes to have time to take effect is important. I recommend checking your credit 4 to 12 months before you plan to start your house-hunt.
The rewards can be significant. Even a few points of improvement on your credit score can mean big savings on your interest rate or closing costs — or grant you access access to entirely different loan options.
To discuss your unique situation and how to prepare for obtaining a mortgage, call (503-799-3711) or email (email@example.com) any time. We can check your credit and run simulators to provide you with insights that will be useful as you prepare for a successful home purchase with the best possible loan terms.
Guaranteed Rate does not provide credit counseling services.
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