Fair Isaac Corp., commonly known as FICO, recently announced impending changes to its credit scoring model that could work in many consumers' favor - including those looking to purchase a home.
The changes mostly pertain to people who have or had medical debts on their credit profiles, though according to FICO, there are actually three significant adjustments to be aware of. Given that the FICO model is used in an estimated 90 percent of U.S. consumer lending decisions, according to Fox Business, any adjustments to its criteria constitute major news. And as far as the housing industry is concerned, any developments that could trigger more buying activity are welcome. The market has experienced uneven sales rates in 2014 and tighter standards for mortgage credit approval have played a large role in creating that dynamic.
Are conditions already improving?
The latest Mortgage Credit Availability Index, released by the Mortgage Bankers Associated, revealed consumers were granted improved access to home loans in July - offering an indication that conditions may be relaxing. Many lenders have either become more comfortable navigating the parameters of the Qualified Mortgage rule, as well as other recently implemented regulations, or have expanded their product lines to include non-QM offerings, such as jumbo loans. If that trend continues, it will allow more creditworthy borrowers to join the homeowning population.
For now, though, it's the FICO changes that are drawing the most attention, as an untold number of consumers could see their financial situations potentially improved as a result. First and foremost, debts that went to collections but were ultimately repaid will no longer count against a consumer's score. Medical debts, specifically, will be treated differently going forward, essentially having a lesser effect as they are evaluated in better context. According to FICO, consumers whose scores were adversely affected by paid-off medical debts can expect to see their marks improve by at least 25 points.
Lastly, new techniques to analyze the creditworthiness of borrowers who have little to no credit history are being implemented. In essence, risk assessment will become a more personalized exercise for lenders, who are given more context surrounding an individual's circumstances, as opposed to simple figures.
If the July MCAI offers any indication, the environment for home loan borrowers is improving. As the FICO changes are phased in and scores are improved, more prospective buyers may enter the market. For housing, which has grown in fits and starts this year, that constitutes a positive development.