Good news for those looking to get a mortgage—one in five U.S. consumers could see their credit score increase this fall.
In a recent Realty Check article [1], Diana Olick said millions of borrowers could qualify for a home loan, however, the changes will add more risk to the mortgage market. Equifax, TransUnion, and Experian announced they will drop tax liens and civil judgments from some consumers’ profiles if information such as the persons name, address, and either date of birth or Social Security Number is missing.
According to a report by CBS Money Watch [2], journalist Kathy Kristof said credit bureaus will also be barred form including medical debt collections if the debt isn’t at least six-months old or if the medical debt was eventually paid by insurance. Civil judgments, public liens, and certain medical debts, which weren’t always accurately reflected on credit reports, were targeted for a number of reasons. Medical debts, unlike that of credit charges, are unplanned and doctors and hospitals have no standard formula for when they send unpaid debts to collection. Some consumers were reported to be extremely late when they may have only been a month or two behind, but others didn’t get reported for years. Court judgments and liens were rarely updated, causing consumers to suffer long after they were paid and liens were released.
Unfortunately, according to Thomas Brown, SVP of financial services at LexisNexis, this could add significant risk to the mortgage market.
"If you look at someone that has a tax lien or a civil judgment, they can be anywhere from two to more than five times more risky just because of the presence of that information. That's very, very significant,” Brown told Olick. "It doesn't really do a consumer well to be extended credit that they can't afford, they can't reasonably service.”
Tim Rood, Chairman of The Collingwood Group [3], a business advisory firm, said this is a welcomed and needed change for millennials and first-time homebuyers that clearly will benefit the mortgage and housing industries.
"Small increases in consumers’ credit scores can push them into a higher credit category, from 'fair' to 'good’,” Rood said. “Some lenders only lend to certain categories of consumers, so being included in the 'good' category could mean the difference for qualifying for mortgage loans.”