This summer could be an excellent time to be a homebuyer, if the new credit score updates are as good as they seem. As of July 1, 2017, the National Consumer Assistance Plan will go into effect. Some borrowers may see their credit scores rise as the three national credit bureaus change how they tally consumer credit reports.
If you’re considering buying a house, you may see upticks in your credit score — potentially affecting the mortgage interest rates you’re eligible for — starting in July 2017. FICO estimates that 12 million Americans may be affected by this new credit score change.
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Credit score change advantages: Buyers and sellers see a boost
The National Consumer Assistance Plan is intended to make credit reports more “accurate, transparent, and understandable.” Once in effect, Equifax, Experian, and TransUnion, the three main credit bureaus that provide consumers with a federally mandated free credit report each year, will make significant changes in how consumers’ civil judgments and tax liens are reported. This is a credit scoring shift that many people don’t know about, yet it could impact the average homeowner’s eligibility to buy a house.
As of July, credit reporting agencies will only collect data on civil debts and tax liens when four personally identifiable information (PII) factors are met: name, address, Social Security number, and birthdate. Both civil judgments and tax liens can negatively affect credit reports and may remain in credit history for a long period of time. With these changes enacted, civil judgments are likely to be removed from the average credit report completely. Up to 50 percent of tax liens could be impacted, according to Credit Plus. Roughly half of all tax liens do not meet the PII criteria for credit data collection.
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From Kendra Barnes’ perspective, the new credit score changes coming in July 2017 will be great for homebuyers. Barnes, real estate investor, real estate investment coach, and founder of The Key Resource, says, “Credit scores have a direct effect on interest rates, so any credit score boost that a homebuyer can get will always be helpful.” Even a boost of 20 points, Barnes says, could allow a buyer to get a lower interest rate. This may add up to thousands of dollars in savings over the life of a home loan.
Giving homebuyers the opportunity to save money on their mortgage is always a good thing. This new credit policy may also spur on positive changes behind the scenes. Allowing consumers to increase their credit scores, even slightly, could cause home prices to increase.
“One of the not-so-obvious answers is that the increase in credit scores will actually help home prices continue to rise,” Jeff Rohde of Simple Condo Advice, a website for new condo buyers, explains. “More people will be able to qualify for a loan, and an increase in credit score means a more creditworthy buyer. It’s one that can afford to buy more house or condominium than they would have before the change.”
In the long-term, a buyer who can buy more house benefits the economy. The overall benefit may be that this trend keeps the housing market moving upward, Rohde says. From a seller’s standpoint, the fact that more buyers can qualify for a home loan helps the seller sell faster. “In addition, if there is an overall increase in credit scores, this also means that a buyer can afford to pay more. Which means that a seller can sell a home for more money than before,” Rohde adds.
July’s credit score changes can have some drawbacks, as we’ll discuss below. But from a buyer’s and seller’s standpoint, Rohde calls it a win-win:
- A seller can sell a house for more money than before.
- A buyer can now afford to buy and stop renting.
- The finance industry, and all the associated businesses, could gain from the housing market.
Credit score change drawbacks: Lenders make adjustments
Mortgage lenders, landlords, and anyone else who relies on credit reporting to screen potential candidates may feel the biggest repercussions from the credit report change. Some lenders worry that laxer credit reporting standards could lead to “false positives” when assessing credit risk.
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Cedric Stewart, a 13-year veteran residential and commercial sales consultant and team leader of Entourage RG at Keller Williams in the Washington D.C. area, agrees. The new credit score system has the potential to hurt the market by punishing good borrowers, Stewart argues. “Penalizing people with large limits and very old tradelines will raise their interest rates, causing them to sacrifice service and other benefits just to save 0.25 percent. Or worse, decide not to buy altogether,” he says.
Come July, Stewart predicts we may also see more new buyers with less home inventory. By eliminating judgement, tax liens, and medical debts from scoring criteria, some credit scores will rise. “A borrower may qualify to buy, but that doesn’t help our current lack of home sale inventory,” Stewart says.
Lenders are paying attention. The new NCAP rules have the potential to benefit the borrower and even boost the housing market, when the necessary precautions are taken during mortgage prequalification and processing. One way to buffer any possible negative repercussions of these changes is to use a Public Record Gap Report — which some lenders are taking advantage of. Credit Plus Inc. is a third-party financial verification service that is now offering credit gap reports among its fraud prevention umbrella. A “gap” report may cover the liens and judgements omitted from the new credit pulls.
These credit report updates may not impact all buyers, but there’s only one way to find out.
Get a free copy of your credit report, if you haven’t already. For those who still need help improving their credit score after the new credit changes, Barnes suggests giving Rent Reporters a try. She says, “Rent Reporters use rent payment history as a credit booster. They contact your current or previous landlord, verify that you’ve had a history of paying your rent on time, then report that to TransUnion.” Barnes explains the process further in her guide and offers a coupon code for $10 off.
Then, reach out to your lender. Ask how the new credit policy may affect your prequalification and interest rates when you’re ready to buy. A lender that’s on the lookout, like we are, will already be prepared for these big changes coming your way. Taking this new credit scoring information into account, we’ll help you select the right loan product with the right rate for you and your family. Credit score updates can be confusing, but that’s what we’re here for. To make buying a house easy.
For educational purposes only. Please contact your qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.