Are you a “transactor” or a “revolver” when it comes to your credit? Terms like these never have mattered much to home buyers seeking a mortgage. You’ve probably never heard of them. Yet they are about to become more important to millions of mortgage seekers, and could even help determine whether you qualify for a mortgage in the first place.
A transactor is someone who pays off credit bills in full every month or makes more than the minimum required payment. A revolver is the opposite: Someone who routinely makes the minimum payment on credit cards and other debts, rolling balances over to the next month. Credit industry statistical research suggests that, all other factors being equal, revolvers tend to present higher risks of future default to lenders, especially when they are accumulating substantial unpaid balances. Transactors tend to be lower risk.
But up until now, mortgage lenders and investors had difficulty distinguishing revolvers from transactors. Credit reports told them whether you as an applicant were late on card payments, whether you defaulted on your car loan, but didn’t tell them what you paid on your balances month by month over extended periods of time. They didn’t reach back to show distinctive patterns and trends in your money management: Did you roll large monthly balances on three credit cards during the last six months of 2015? Are you a rate surfer, transferring balances from one account to another, always making minimum or no payments? Up until recently, traditional credit reports used in the mortgage arena weren’t able to answer questions like these. Now they will.
Fannie Mae, a dominant player in the mortgage market, will soon begin evaluating how all loan applicants have managed their credit over the previous two years – how much they owed in revolving debt each month, the minimum payment allowed on each debt, and how much they actually paid. Mortgage credit reports acceptable to Fannie will need to include “trended credit data” like this on every applicant.
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As a general rule, according to Eric Rosenblatt, Fannie’s vice president of credit risk analysis and modeling, the new system will “benefit borrowers who regularly pay off revolving debt” and should “provide more creditworthy borrowers access to mortgage credit.” That’s a big deal.
Starting June 25, the new reach-back data will become an integral part of Fannie’s automated underwriting — an online system that is used by the vast majority of mortgage lenders to determine whether applicants are eligible for the loan they’re seeking. Two of the three national credit bureaus — Equifax and TransUnion — will supply two years worth of continuous, month-by-month data on the credit management patterns of millions of mortgage applicants.
This should prove especially important for consumers who might not qualify for a mortgage because their credit reports contain too little information to generate a credit score. Many of these would-be purchasers are first-timers – millennials just starting out on their careers. Others are individuals who simply do not make much use of credit but now need a mortgage.
TransUnion conducted a study of “unscorables” and found that by adding credit usage data into their reports, 26 million thin-file or unscorable consumers could generate credit scores and that nearly three million of these consumers could be classified as “prime” or “super prime” credit risks — possibly qualifying them for reduced interest rates from lenders, according to Joe Mellman, TransUnion’s vice president and mortgage business leader.
Fannie Mae’s use of the new credit report data will not affect anyone’s FICO credit score, but it will open the door for applicants who look marginal or unqualified yet demonstrate responsible credit management habits over time. They may not have vast amounts of credit available to them, but they pay off or limit their balances.
Experts in the credit industry consider the upcoming move by Fannie Mae to be a major advance in fairer credit. Terry Clemans, executive director of the National Consumer Reporting Association, says it amounts to “the biggest change to the mortgage credit report in nearly a quarter of a century.” Freddie Mac, the other big mortgage investor, is “evaluating” whether to adopt a similar approach, according to a spokesman.
Bottom line for you: Be aware that how you manage your credit could now become a key determinant of whether you get a mortgage. Transactors will reap the benefits; revolvers playing games with credit cards will get more scrutiny.
Kenneth Harney is executive director of the National Real Estate Development Center.