How You Pay Matters
Are you a “transactor” or a “revolver” when it comes to your credit? Terms like these never have mattered much to home buyers seeking a home loan. You’ve probably never heard of them. Yet they are about to become more important to millions of home loan-seekers and they may even help determine whether you qualify for a loan in the first place.
A transactor is someone who pays off credit bills in full every month or makes more than the minimum required payment. A revolver is the opposite: someone who routinely makes the minimum payment on credit cards and other debts, rolling balances over to the next month. Credit industry statistical research suggests that, all other factors being equal, revolvers tend to present higher risks of future default to lenders, especially when they are accumulating substantial unpaid balances. Transactors tend to be lower risks.
Until now, lenders and investors had difficulty distinguishing revolvers from transactors. Credit reports told them whether you as an applicant were late on card payments and whether you defaulted on your car loan, but they didn’t show what you paid on your balances month by month over extended periods. Fannie Mae, a dominant player in the housing market, will soon begin evaluating how all loan applicants have managed their credit over the previous two years: how much they owed in revolving debt each month, the minimum payment allowed on each debt and how much they actually paid.
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 credit.” Starting June 25, the new reach-back data will become an integral part of Fannie’s automated underwriting, an online system that is used by the vast majority of lenders to determine whether applicants are eligible for the loan they’re seeking.
Source: Ken Harney, The Nation’s Housing
Note: The date of implementation has been delayed by Fannie Mae until September 24