While many types of lending such as auto loans and credit cards have opened up in recent years, one area of lending seems to still be in a deep freeze; mortgage loans. The problem? The average American's credit score is currently about 100 points short of where it needs to be to get approved for a mortgage.
The New Credit Scoring System
A new credit scoring formula developed by Fair Isaac is being currently tested by a couple of dozens banks. No one knows how many banks may begin to accept the new scoring algorithm, but it is interesting to keep an eye on. The new methodology takes into account factors not normally counted for the purposes of credit scoring. Two major items included in the new system are rent and utility payments. This gives most people a chance of having at least two decent 'credit' accounts even without owning a home or having any other traditional credit.
I really like the idea behind this system. When I was a partner in a mortgage brokerage firm a few years ago we had a couple lenders that would take into account a good rental payment history and would even allow utilities to be counted as qualifying tradeline in the approval process. This really make a lot of sense when you consider the plight of many Americans today. If you have lost a home due to foreclosure it is very difficult to rebuild your credit when your starting point is a low credit score. I have always felt it was unfair to not give people some credit scoring benefit for on time utility payments. If the idea here is to evaluate a person's faithfulness in paying their obligations, rent and utilities would seem to be a worthwhile inclusion.
How You Can Benefit Now
If you have on time rent and utility payments you should definitely mention this when shopping for a mortgage. If your score is on the low side an excellent rental payment history can be a big plus. It is important to keep good records so that you can prove the timeliness of your rent payments. Canceled checks are considered the best proof. Some lenders will accept a rental history print out, but only from a bona fide property management firm. If you pay your rent in cash to your landlord you may run into trouble getting a lender to accept your rental history. I have seen many loans turned down for this one reason alone.
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Unlocking The Credit Scoring System
I recently co-authored a new book on credit scoring that is available at Amazon.com. Credit Scoring Secrets - What They Don't Want You To Know contains some little known strategies on credit scoring that I learned as a partner in a mortgage brokerage. We were able to boost some people's scores by as much as 100 points in just six months using these techniques. The book is available for $6 online or can be accessed for free if you are a member of Amazon Prime.
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