What do you do if you’re financially
responsible, but don’t have a credit score? How do you get started on the path
to home ownership if your score is low due to traditional credit reporting?
FICO believes it might have the answer. (Others think it might not.)
Here’s
what you need to know.
If you’re in the market for a home, you’re probably in the market
for a mortgage. With the exception of all-cash buyers, most buyers will find
out soon what their FICO score is and what banks think about it.
The FICO score has a huge impact on whether or not lenders
consider you an acceptable credit risk, and yet there are more than 53 million
Americans out there who don’t have a credit score at all. This doesn’t mean
they’re a bad risk, necessarily… it just means they haven’t used credit cards,
held a previous mortgage, or had an auto loan. They may be perfectly
responsible financial citizens. So how do they apply for a mortgage?
In an attempt to broaden access, FICO has begin to factor new data
sources. Announced in April, 2015, FICO will now include two additional
sources: A national utility database, presided over by Equifax, and LexisNexis,
which relies on public records.
The idea behind the change is this: First, the timeliness of
utility payments can be used as month-to-month evidence of financial health.
Second, FICO will be looking at LexisNexis address changes to determine how
often people have relocated. In theory, frequent moves may be an indication of
increased risk.
Though the impulse may be good, the changes are not without some
controversy. Some argue the accuracy of the Equifax database may be a concern.
It also adds one more credit reporting database which must be monitored.
There’s also a worry that the “frequency of move” may unfairly punish people
and provide a disincentive for relocations, downsizing, and upsizing of homes,
provided FICO only uses the LexisNexis information in a punitive way.
More details are sure to emerge, but one thing is for sure: The
era of Big Data in the cloud will be sure to cast their shadow on the way
financial institutions assess risk in the years ahead. One hopes that they
ultimately let in more sunshine than shade when it comes to helping buyers
attain the dream of homeownership.
Are you ready to explore the dream? Contact me today. I'd be happy to help you navigate the home buying or selling journey: valerie@valeriemcconville.com
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