New FICO 09 Score Model Will Be Introduced in the Fall, but why Won't Mortgage Lenders Be Using It?
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FICO, the leading credit score model used by lenders and creditors, announced the new FICO Score 09 model which will be released in the fall. The model will be used at the consumer myfico site and possibly by car lenders and credit card grantors. Amongst other changes, the major difference for this score is in medical collections.
Under the current models used by most mortgage banks, medical debt collections can be very damaging to consumer credit scores. Medical collections are popular causes of credit score drops that occur for a variety of reasons. A recent study by Trans Union revealed that 54% of insured individuals are confused about medical bills. Credit scores can drop hundreds of points from one collection, and most people do not understand how easily they can be put in this vulnerable position.
However, the new FICO score will place less emphasis on this medical debt. People with medical collections that are paid off will see the highest raise in their credit score, and those with unpaid collections will see some damage lifted off their report. According to FICO, consumers who solely have unpaid medical debts as major derogatory references could see a median score increase of 25 points.
Even though this sounds great for people with medical debt, they will not be in the clear after this summer if they are looking for mortgage approvals. FICO’s last version, FICO 8, was released in 2008 and has only recently been adopted by a small amount of lenders. To date the majority of merged credit reports we view from mortgage banks use the FICO 4 , 5, and V2 models. Banks tend to be very conservative with lending, especially for large loans like mortgages. Just because a new score is out doesn’t mean it will be used by mortgage lenders, and it is highly unlikely that banks will adopt a credit score which ignores unpaid collection accounts.
Mortgage professionals and realtors must educate their referral sources and clients since many may assume if they wait until the fall their credit scores will increase and they will be approved for loans at lower pricing. This could cause buyers and refi applicants to avoid fixing their credit and wind up delaying transactions only to be disappointed and frustrated.
Fannie Mae and Freddie Mac are still using the older versions of the FICO score models in their own underwriting software. Fannie and Freddie have not expressed any intention of changing to the newer less conservative models but said they were confident in the tools they currently use.
Unfortunately this will cause confusion in the fall. When ordering FICO score from the consumer site, individuals have to be mindful that it may be even more inflated than the past FICO 8 version was. Individuals must understand the myfico site model does not accurately reflect what lenders see.
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