How Will the New Credit Score Adjustments Impact Home Buyers?

You may have heard that Fair Isaac has announced it’s updating the way it calculates credit scores. It’s likely that many Americans are going to see their credit scores going down, below what they might need to have to qualify for a home mortgage. Understandably, this is going to have both short-term and long-term impact on the real estate market—but the news might not all be bleak.

Credit Scores Are About To Get A Little More Volatile

With mortgage rates at an extraordinarily low level, many new home buyers are entering the market. But credit scores are about to become a little more volatile, and that could impact their loan qualification. Consumers with scores above 680 may be more likely to see their scores increase, while those with scores below 600 may see their scores drop. Those who are just on the edge of a certain credit rating may see their credit rating change and may find themselves spending more when borrowing.

Here are the major changes being made:

• Consumers with growing amounts of debt will be more harshly rated.
• Unsecured personal loans are going to have additional weight.
• Consumer’s debt levels within the past two years will be factored in.
• Consumers who carry credit card debt from month-to-month will see decreased scores.

American credit scores have reached an average record high. More than 59% of Americans currently have a credit score of 703. This new credit score adjustment can be seen as a correction, as currently, credit scores may not accurately reflect the risk of the borrower.

Consumers today are under a large amount of debt, especially unsecured personal loans. The proliferation of online lenders such as Affirm and AfterPay are making it easier for consumers to get short-term payment plans, and more people are living off credit. Ultimately, these credit score adjustments are going to change the landscape for consumer borrowers, and that means it will also impact those who are purchasing real estate.

Long-term, this may be good for the real estate market. No one wants to see another market collapse, which is exactly what could happen if borrowers are allowed to borrow more than they should. Short-term, it may make the market a little more tumultuous. Lenders are going to see a change in applications and real estate agents are going to see a marked difference in their clients’ qualifications and pre-qualifications. The credit score variance could be as much as 40 points—a shock to a borrower who isn’t expecting it.

Sub-Prime Lending May Take A Hit—But Well-Qualified Borrowers May Be Able To Do Better

As mentioned, these changes are volatile in nature. Borrowers who were on the cusp of being able to purchase a home may no longer qualify. Borrowers who were already well-qualified may be able to get better interest rates, and therefore have more purchasing power. First-time home buyers and sub-prime buyers are likely to be the hardest hit. That’s something for both real estate agents and developers to consider. Low-cost housing targeted towards first-time home buyers or sub-prime buyers may see a reduction in applications, and more moderately priced, or highly priced homes may see an increase in qualified buyers.

This FICO change is already being rolled out, and most consumers are going to see a change within the next six months. That means that current buyers may see a hit to their credit score while they’re in the process of looking for a home and getting qualified for a loan. For real estate agents, it’s critical that they be conscientious about these credit score changes, and work to explain the changes to their clients. For those elsewhere within the real estate market, these changes are more likely to have a slower, ripple effect.

Velocity Title understands how to work with our clients’ unique needs when the market changes. We make sure our lenders have the information they need, and our realtors are one step ahead of every transaction. One way we’re streamlining your needs in 2020 is with our instant quote calculator. Check it out here, or contact us to learn more today!