Fair Isaac Corp. (FICO) is probably the leading provider of credit scores in the country. They recently partnered with data firm CoreLogic to add factors that are considered in credit scores. The result is a more accurate score and the data shows that more people are good credit risks than originally thought.
Why the new credit scoring systems matters to you
The new score combines data that credit bureaus typically track like mortgages and credit cards, with outside data CoreLogic obtains from public records like property records and liens; but it also includes payment histories on short-term installment loans for used cars and rental information.
“By having that added visibility, we are able to get a more precise score and picture of the borrower,” says Tim Grace, vice president of CoreLogic, recently told Bloomberg.
Under the new scoring system, the number of people with the highest scores jumped from less than 20 percent of the population to about 44 percent. That could make it easier for many potential home buyers to qualify for mortgages. Making the score a better predictor of mortgage defaults could result in banks approving more mortgages and being able to lower interest rates.
CoreLogic believes that the combined data can be 10 percent more effective at predicting mortgage defaults for the riskiest 10 percent of borrowers.
Increased availability of credit should have a positive impact on the real estate market. There would be more potential buyers. There would also be more home owners eligible for second mortgages or lines of credit backed by their property. Home owners could use this credit line to improve their home and some will undoubtedly want to catch up on deferred maintenance.
These factors point to a sustained real estate recovery. Price gains will be slow, so now may not be the best time to sell. Home owners over the age of 62 have long had access to reverse mortgages, which allow them to access part of the cash value of the equity in their home without having to sell.
That allows borrowers to hold onto their home and benefit from price gains. A reverse mortgage is available based solely on the home equity and has never been contingent on a high credit score. However, anything that boosts the housing market is a benefit for reverse mortgage borrowers.
Reverse mortgage borrowers could also benefit from lower interest rates. With the new scoring system, banks should have less risk when making mortgage loans and they should lower interest rates to reflect that change.
Of course they may decide not to lower rates, since that could cut into their profits. We will know in time what happens with interest rates, but for now we view the new scoring system as a positive for the housing market.