Are you a transactor or a revolver when it comes to your credit?
Although you may have never heard these terms, when it comes to your credit, they are about to become very important and will impact how millions of Americans qualify for a mortgage.
Starting this September, Fannie Mae’s automated underwriter system will begin to analyze and weigh risk based on a person’s payment history on his credit cards. In theory, there are going to be two different borrowers, a transactor or a revolver.
Transactor—This is the person who pays off his credit cards and other debts each month or makes more than the minimum required payment.
Revolver—This is the person who makes the minimum monthly payments on his credit cards and subsequently, pays interest on the balances.
Until now, mortgage lenders had difficulty distinguishing revolvers from transactors, but that is about to change. Two of the three national credit bureaus, namely 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 mortgages because their credit reports contain too little information to generate credit scores. Many of these would-be purchasers are first-timers or millennials just starting out on their careers. Others are individuals who simply do not make much use of credit, but now need a mortgage.
Fannie Mae is now going to be able to distinguish between these two types of borrowers. 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.” Transactors will reap the benefits, while revolvers will get more scrutiny.
Here is a scenario to show how this change will have a positive impact on a transactor who previously may have had a lower credit score.
Mary has a credit card with a $5,000 limit. She only has the one credit card and uses it all the time. This was her first card and the limit still is very small relative to her income, as she has never asked for the limit to be increased as her income increased. She makes $300,000 a year, and spends about $4,500 a month on her card, but pays the balance off each month.
Joe has five credit cards with a total of $25,000 credit limit. He only makes $24,000 and has a total of $5,000 credit card debt. He only pays the minimum due on his cards, but has never been late or missed a payment.
Mary has a utilization rate of 90 percent because she has used $4,500 of her available $5,000 credit. Joe has utilized only 20 percent. Mary pays no interest, and has a monthly credit card balance that is less than 2 percent of income. Joe has debt that is 21 percent of his gross income, and he pays a lot of interest.
Clearly, Mary is a much better credit risk than Joe. However, all else being equal, Mary would much likely have a much worse credit score because of her high utilization rate compared to Joe. The new Fannie Mae underwriting now will be able to see these patterns and use this data, which will have a positive impact for transaction borrowers.
Experts in the credit industry consider the upcoming move by Fannie Mae to be a major advance in fairer credit. According to Terry Clemans, executive director of the National Consumer Reporting Association, it amounts to “the biggest change to the mortgage credit report in nearly a quarter of a century.”
Only Fannie Mae is implementing this approach. So, a borrower who would be considered a revolver could just go to Freddie Mac instead of Fannie Mae for a loan. However, Freddie Mac is evaluating whether to adopt a similar approach, according to a spokesman.
The bottom line is:
If you are a transactor—Fannie Mae might be a better lender for you, as they have the ability to use this data and possibly offer better terms than lenders without it.
If you are a revolver—For now, Freddie Mac may be a better lender. So, make sure whichever mortgage company you use can offer loans by both Fannie Mae and Freddie Mac. You also need to be aware of the fact how you manage your credit could now become a key determining factor associated with securing a mortgage.
Please contact me if you would like more information, or contact Kelly Zitlow at Cherry Creek Mortgage. Call (480) 398-4908, or send an email to kzitlow@ccmclending.com.
Lorraine Ryall has been a Multi-Million Dollar producer for the past seven years. You can reach Lorraine at (602) 571-6799. You also can send her an email at Lorraine@Homes2SellAZ.com, or visit her website at www.Homes2SellAZ.com.