Great news! Home buying just got a lot easier. A combination of two major changes in credit reporting and lending criteria could help tens of millions more individuals and families to qualify for a home loan.
In 2012, the Federal Trade Commission determined that at least 20% of those surveyed had at least one error in their credit reports from one of the three major credit reporting agencies, Equifax, TransUnion and Experian, which had negatively affected their credit score. Errors included incorrect information from collection agencies, identity theft issues and mistakenly adding an individual’s data into someone else’s file.
Many state attorneys and other regulators have been pressing the three bureaus to raise the accuracy of their identity verification and updated credit reporting.
In response, as of July 1st, many with tax liens and civil judgments reported in their file will be receiving a break. Approximately 7% of 220 million people will have their credit scores go up an average of 20 points if the information does not include the person’s name, address, and also either their date of birth or Social Security number. Data must be updated every 90 days. According to Experian, this means nearly 96% of civil judgements and 50% of tax liens will be eliminated from their records.
In addition, but not directly related, as of July 29th, Fannie May and Freddie Mac mortgage giants have changed their lending approval standards, raising their DTI (debt to income ratio) from 45% to 50%. An overly high DTI is the number one reason homebuyer applicants get rejected. This is most prevalent for millennials, still just starting their careers while struggling to pay high student loan debts. Lenders are happy with the change. Real estate values have been ascending to an all-time high once again due to a significant decrease in home buyers and mortgage volume. Lenders had already been lessening their credit approval standards to compete in this increasingly tight market.
Detractors to the DTI increase are vocal in their concern that the change will add a great deal of new risk to the mortgage market again, and as Fannie and Freddie are government-sponsored, tax-payers will be paying for it. Opponents also predict that interest rates will rise to offset the increased risk. Fannie Mae maintains that the risk will not change, as they have discovered that those with a 45-50% DTI are notably likely to have good credit scores and are not considerably more likely to loan default. Other proponents of the new DTI say the lenders won’t be gambling on a greater risk, with some predicting that there will be a tightening in other areas of mortgage underwriting. For example, lenders may require higher down payments and offer lower loan amounts. What will happen remains to be seen.
Do you think that this change will impact your ability to buy a home? Than please note that standards and criteria will likely differ throughout the mortgage lending market, so it is recommended that you consult with a variety of lenders.