When it comes time to making an offer, smart real estate agents know a potential buyer who doesn’t have a pre-approval from a lender presents a greater risk than one with pre-approval. A pre-approved borrower is more likely going to get final approval. And once the home appraisal is complete, the agent and seller can expect close quickly.
Of course, the key to pre-approval is good credit. Money for a down payment is important, but the primary measure of risk for the lender is, and has always been, a borrower’s FICO score.
Going Beyond Payment History
A borrower’s payment history accounts for 35% of their credit score, with only amounts-owed coming in a close second at 30%. Length of credit history accounts for 15%, and types of credit and new credit are tied at 10%.
Now, according to The Wall Street Journal, the way credit scores are determined is about to change for the first time since the 1990’s.
The so-called UltraFICO score would likely increase the number of approvals for both credit card and personal loans, including mortgage loans. This new scoring, set to roll out in 2019, may just be a win, win, win, for lenders, borrowers, and real estate agents. Here’s why:
- For lenders, this UltraFICO means potential increased loan volume.
- For borrowers with a “thin” credit history, less-than-stellar credit, and even some subprime borrowers, chances of loan approval should be greatly improved.
- For real estate agents, more pre-approved customers could be ready to purchase a new home.
Lenders have been looking for ways to expand loan volume for years. With an average U.S. FICO score of 704, low unemployment, and consumer loan balances at record highs, the number of creditworthy borrowers has dwindled. Lenders are hoping that UltraFICO will surface borrowers who’ve been turned down for a loan even though they are creditworthy.
How It Will Work
Borrowers have had little control over their FICO score up until now. They can ask the credit bureaus to correct inaccurate information but that’s basically it. UltraFICO will enable potential borrowers to contest the credit bureaus’ initial findings and ask the lender to use another asset account to have the their credit score recalculated.
For example, the borrower could choose a checking account with frequent transactions and no overdrafts over a fixed period of time. This additional insight into the borrower’s financial activity could boost their FICO score enough to get approved.
The Bottom Line
UltraFICO, along with other changes being undertaken by the individual credit unions — deleting tax lien and civil judgment information from credit reports, removing inaccuracies on some accounts in collection after settlements reached with state attorneys general going back to 2015 — could improve some borrowers’ FICO scores anywhere from 14 to 20 points.
Of course, some borrowers could see a drop in their score based on this previously unseen financial activity. But, with roughly 7 million potential borrowers with low FICO scores due to a thin borrowing history, and another 26 million subprime borrowers, UltraFICO may be the good news that lenders, borrowers, and yes, real estate agents have been waiting for.