Fannie Mae recently incorporated the use of trended credit data as another input in the mortgage qualification process. In short, Fannie Mae is a government-sponsored enterprise (GSE) that develops mortgage programs and underwriting policies.  Fannie Mae also provides capital to lenders by buying mortgages from them.  Although the policies and practices used by Fannie Mae do not apply to all borrowers, lenders or loans, they have meaningful impact on borrower qualification guidelines across the mortgage industry.  Because of Fannie Mae’s status within the industry, the use of trended credit data is a development all mortgage industry participants should monitor and understand.

 

What is Trended Credit Data?

A traditional credit report contains information on a borrower’s current debt account balances, credit usage and availability and on-time payment history.  By comparison, trended credit report data contains monthly information on how a borrower has managed their credit and paid their bills over the prior twenty-four months.  For example, trended credit data shows if borrowers have made the minimum payment, paid more than the minimum payment or consistently paid off their credit card balances on a monthly basis over the prior two years.  

 

How Is Trended Credit Data Used?

Trended credit data provides lenders with additional and more granular information that they can use as an additional input to determine if an applicant qualifies for a mortgage.  For example, research shows that borrowers who consistently pay more than the minimum required monthly payment or who regularly pay-off their credit card bills are significantly less likely to default on their home loan.  With these borrowers, trended credit data provides more relevant information to inform the lender decision-making process than a standard credit report which only offers a snapshot of a borrower’s credit profile at a given point in time and may not give the borrower proper credit for effectively managing their finances.  

 

What About Your Credit Score?

It is important to highlight that trended credit data does not replace a borrower’s credit score and your credit score remains an integral factor in determining the mortgage rate you pay on your loan.  Trended credit data that demonstrates an applicant’s ability to consistently repay debt over time, however, may enable more applicants with lower credit scores to qualify for a mortgage.  The use of trended credit data in the mortgage process should also motivate borrowers to consistently make more than the minimum payment on their credit card accounts, which has the added benefit of saving them money on interest expense.

 

What Borrowers Should Do

Because trended credit report data was implemented relatively recently, applicants should ask lenders if it will be used in the mortgage qualification process and understand if using trended credit data helps or hurts their ability to qualify for a mortgage.

 

It will also be interesting to see if trended credit data is adopted as a borrower qualification factor more widely across the mortgage industry.  In the meantime, borrowers should continue to proactively manage their credit profile by making sound financial decisions such as paying down their credit card bills and other recurring debt over time.

 

FREEandCLEAR provides a comprehensive overview of your credit score and the mortgage process, including the use of trended credit data, that borrowers should review before applying for a home loan.

As of October 1, 2016, the USDA lowered the upfront and ongoing mortgage insurance fees for the USDA Guaranteed Home Loan Program.  The USDA Home Loan Program enables eligible borrowers to buy homes located in federally-designated rural areas with no down payment.  The program is designed to help individuals with low-to-moderate incomes afford to buy homes in rural communities.  USDA guaranteed home loans are available through approved lenders such as banks, mortgage  brokers, mortgage banks and credit unions but the loans are backed, or insured, by the USDA.

 

The USDA charges borrowers upfront and ongoing monthly fees to provide insurance that protects lenders in the event that borrowers default on their mortgage and cannot repay their loan.  These fees are similar to upfront and ongoing FHA mortgage insurance premium (MIP) for an FHA home loan or the monthly private mortgage insurance (PMI) fee for a conventional loan.  The upfront USDA mortgage insurance fee is also called a guarantee fee and the ongoing mortgage insurance fee is known as an annual fee (even though borrowers pay the fee monthly along with their mortgage payment).

 

On October 1st, the USDA reduced the upfront mortgage insurance fee from 2.0% of the loan amount to 1.0% of the loan amount and reduced the ongoing annual insurance fee from 0.5% of the loan amount to 0.35% of the loan amount.  The reduction in the upfront and ongoing USDA mortgage insurance fees reduces closing costs and total monthly housing expense for borrowers.

 

For example, based on the lower fees, for a $200,000 loan the upfront guarantee fee is reduced from approximately $4,080 to $2,020 and the ongoing monthly fee is reduced from $85.00 to $59.00. The example below demonstrates how the fees are calculated.

 

Up-front USDA mortgage insurance or guarantee fee

• First, we calculate the total mortgage amount including the the upfront USDA mortgage insurance fee:
• $200,000 (mortgage amount before USDA mortgage insurance) + $2,000 (upfront USDA mortgage insurance) = $202,000 total mortgage amount
• $202,000 (total mortgage amount) * 1.0% (upfront USDA mortgage insurance fee) = $2,020 (up-front USDA mortgage insurance fee)

 

Ongoing monthly USDA mortgage insurance fee

• $202,000 (total mortgage amount) * .35% (ongoing annual USDA mortgage insurance fee) = $707 (ongoing annual USDA mortgage insurance fee) / 12 months = $59.00 monthly USDA mortgage insurance fee

 

Reducing mortgage insurance fees for the USDA home loan program should make home ownership more attainable for more borrowers, especially for people who can afford to make a monthly mortgage payment but who may struggle to save money for closing costs.
FREandCLEAR provides a comprehensive overview of the USDA Home Loan Program including borrower qualification requirements and property eligibility guidelines.  We also encourage you to use our USDA Home Loan Calculator to determine what size USDA loan you can afford as well as the upfront and monthly USDA mortgage insurance costs based on the new, lower guarantee and annual fee rates.