WASHINGTON–Potential mortgage borrowers are going to have to start paying more attention to their credit cards.
Effective in June, Fannie Mae said that when it comes to buying home loans it will now favor borrowers who are making efforts to pay down their credit cards, rather than just pay the monthly minimums. Freddie Mac indicated it may also pursue the same policy.
“It’s not a bad thing to have credit cards, but you have to use them wisely,” said Mindy Armstrong, product manager for Fannie Mae, in a released statement.
Armstrong said the policy will make it easier for borrowers who might be on the cusp of approval for their loan to be bought by the agency to get an OK, she said. “This trended data approach could get them into the approval bucket,” Armstrong said.
Fannie Mae said that in cooperation of two of the biggest credit reporting agencies, TransUnion and Equifax, it will begin looking at credit card data going back as far as two years (24 months) beginning on June 25.
The so-called trended data, which includes amount of payments made and total amounts remaining on the balance, will only include revolving credit card accounts, but not other consumer debt payments, such as mortgage loans or student loans. The trended credit data that will be available to lenders will include the minimum payment due, the actual payment amount, and the balance each month, Fannie Mae said.
Fannie Mae offered this example: if two borrowers have $10,000 in credit card debt, have equal credit scores and are making their payments on time, Fannie Mae’s automated loan approval software will now favor the borrower (a so-called “transactor”) who had $20,000 in credit card debt six months ago and paid it down by half, over the borrower (the so-called “revolver’) who had $3,000 in debt six months ago, but charged up another $7,000 while making only on-time minimum payments.
Fannie Mae noted that borrowers who pay off their credit cards at the end of every month are 60% less likely to be delinquent on their mortgage than borrowers who only make their minimum payments, even if those minimum payments are made on time.