Government considers switch to alternative credit scores for mortgages

These days, when consumers apply for most types of loans or other financial tools, their credit score is going to play a huge role in a lender's decision. This is especially true of mortgages, for which credit restrictions are often considerable, and effectively lock out a massive portion of the population from ever getting involved with the mortgage credit system. However, that might be changing in the near future when it comes to home loans sought through the federal government, or the mortgage-backing enterprises it sponsors.

Fannie Mae and Freddie Mac, the two massive GSEs that collectively back the majority of home loans nationwide, as well as the U.S. Department of Housing and Urban Development, which issues its own mortgages and oversees Fannie and Freddie, may soon incorporate "alternative" credit scores into how they examine a would-be buyer's mortgage application, according to a report from National Mortgage Professional. These alternative scores would take into account not just how they've handled credit in the past, as standard mortgage lenders do, but other types of non-credit monthly payments including those for rent.

Why is this beneficial?
The aim of Fannie and Freddie, as well as HUD's initiative of issuing mortgages through the Federal Housing Administration, is to get mortgages to people who can afford them but may have difficulties building up a credit score or financial peripherals strong enough to get approval for a traditional mortgage, the report said. With this in mind, it stands to reason that only using traditional credit scores - even with lower standards than most lenders when it comes to marginally prime or subprime borrowers - might be a bit of a hindrance when it comes to helping consumers get the financial assistance they may need to make a home purchase.

Indeed, some estimates from the credit industry itself show that there may be as many as 64 million Americans with either no credit history, or one that isn't big enough to get them any sort of consideration from traditional financial institutions when it comes to just about any sort of credit, let alone mortgages, the report said. For this reason, the use of alternative credit scores may bring enough people into the borrowing ecosystem that it helps them to feel better about their chances for getting a home, and leads them to apply for a mortgage in the first place.

What to do until then
While it's currently unclear whether Fannie, Freddie, and HUD will adopt alternative credit scores as a means of evaluating consumers' mortgage applications, it's important for people looking to improve their credit standing to keep in mind that these scores - including those from PRBC - are already available for many other issues. Because these ratings take into account more than just how a person has handled their credit accounts specifically, they should help to paint a more complete picture of any individual's financial wherewithal on an ongoing basis, and put them in a better position to succeed going forward.

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