Oct. 29, 2018.
A big chunk of credit scoring is based on your payment history. (Approximately 35 percent, if you want to get specific.) So, when you’re looking to take out a loan or another line of credit, this is primarily what your lender will be looking at — until now.
The new FICO credit scoring model has just been announced for early 2019. The UltraFICO is one of the biggest changes made to credit reporting in over 20 years. Instead of using payment history, FICO creator Fair Isaac says lenders are now going to look at how you manage your bank account, i.e., your checking, money-market, and savings. This shift sounds pretty good at face value and should make it easier for at least 7 million more people to get a loan. But if you’re planning to buy a house, the new UltraFICO may not be as helpful as you think.
Here’s what everyone’s getting wrong about the new UltraFICO and mortgage
FICO says that the new UltraFICO credit score puts you back in control and can essentially be used as a safety hatch if your credit score isn’t looking so great. As an example, if you have low or no credit, you can request the UltraFICO as backup. Then, a lender will take into account your checking and savings info to give a nice little bump to your score.
So far, so good. But. If you’re getting ready to buy a house and want to put homebuying on hold until the new UltraFICO comes out, you’re probably not going to be better off if you wait.
Using UltraFICO to prove you’re financially responsible can make a difference if your score is lacking. Having healthy credit matters when you’re buying a house, and a higher credit score could earn you a lower and more affordable mortgage interest rate. Still, the new UltraFICO won’t impact the house loan you’re applying for until Fannie Mae and Freddie Mac (the government-sponsored enterprises who fund mortgage lenders) update their required credit scoring models, and this isn’t likely to happen soon.
There’s a better way to mortgage (and to house-hunt, check your free credit report, and upload loan docs remotely). Get ready to fly.
Many news outlets say the UltraFICO could make it easier for you to get a mortgage, but as of now, this isn’t the case. The truth is that you have as much a chance of qualifying for a mortgage right now as you do in a few months when the UltraFICO becomes available. In fact, you might have an even better chance of qualifying for a mortgage with a low monthly payment now at a time when mortgage rates are historically low and housing prices are stable.
3 ways to leverage your credit and lock in a lower rate
If the UltraFICO won’t make it easier for you to buy a house, what will? Try one of these simple credit-boosting tips to get you home faster:
1. Check your credit, if you haven’t already.
Every year, you’re entitled to a free credit report from one of the three main credit reporting agencies, and you can get it at www.AnnualCreditReport.com. You can also get your free credit report when you prequalify through Cornerstone for a mortgage: Just download LoanFly and do it remotely.
The reason checking your credit is point numero uno is because you may not need to do as much as you think to get into a new house with a low monthly payment. In the past few years, getting a mortgage has gotten much easier. The average FICO credit score is also on the rise — even before the UltraFICO — reaching a solid 704 nationwide. So, get prequalified, get your credit report, and get in touch with your lender. Your credit may already be good enough to buy.
2. Start building your credit.
If you have bad credit or no credit, potentially benefiting from the UltraFICO most of all, there are a few action steps you can take. Get a secured credit card if you don’t have any credit to speak of. Or, apply for a credit-builder loan that you can use as a forced savings plan. You can even ask a trusted family member or significant other to put you on their credit card as an authorized user or qualify for your own new credit card or loan with an approved cosigner.
Simple as it sounds, taking these steps to improve your credit can have an impact on every part of your life. Duke researchers found in 2014 that your credit score says a lot about your health, and low credit may be linked to heart problems.
3. Use revolving debt to your advantage.
So-so credit will begin looking like healthy credit when you use your credit cards as intended: to manage debt responsibly. Keep two to three open credit cards with a minimum $300 limit, pay them on time, and maintain a regular balance of $1 to 25 percent of each card’s max limit. To increase your credit score, bank and credit union cards hold more weight than retail cards. While the average national credit score is sitting pretty at 704, credit scores can vary by state. Millennials, often a first-time home buyer, may also need more help building credit before buying a house. A 2018 Experian study showed that only 39 percent of millennials without a mortgage have a prime score or better.
But pay attention to your credit, and you can hit this sweet spot of a prime credit score, ranging from 661 to 780, fairly easily. And once you make it to 661, you could save $80 or more on your monthly mortgage by qualifying for a lower rate.
Here’s how to get a mortgage and build your credit the easy way: Do the simple stuff first. Download LoanFly, input your info, find out how much house you can afford, and get access to your free credit report that your loan officer will be happy to review with you. Cornerstone has more loan programs than many other lenders to meet the financial needs and credit requirements of all our borrowers. Even without UltraFICO, your credit may already be good enough to buy.
For educational purposes only. Please contact a qualified professional for specific guidance.
Sources deemed reliable but not guaranteed.