Recently, it was announced that fall of 2014 would see a major revamp in the way that credit scores from FICO were compiled. FICO is still the leading model of credit scores that is used by lenders today, and it has gone through changes over the years. This most recent change – FICO Score 9 – is planned to be adapted in the fall and will have some impact on various aspects of credit around the nation – but it won’t make a major change on the mortgage business.
The big change that is coming with this new credit scoring system is that medical bills will be different. At the moment, unpaid medical bills have a major impact on credit scores, and are among the most common reasons for credit score drops. In fact, a single medical bill turned over to a collection agency could lead to a decrease of hundreds of points on your credit scores. And with about 54% of those with insurance today not fully understanding their medical bills, it’s all too common.
According to the new FICO scores, those with unpaid medical bills won’t face as major a drop. That’s great news for those who are applying for credit cards and other credit accounts, but it doesn’t impact mortgage loans or the mortgage industry as much as some might think.
That’s because the introduction of a new credit scoring system doesn’t automatically mean that lenders will actually use it. And when it comes to the large amounts of money that are loaned out in a mortgage, the fact is that banks aren’t going to adopt a scoring system that completely ignores unpaid debts.
Major lenders are still using versions of FICO score models that are previous to even the last model – FICO Score 8 – and it’s unlikely that they’ll be adopting the new model at all.
So what does this mean to those looking to borrow money for a home? Essentially, it means that when you take a look at your FICO score and see a high credit score, bear in mind that this may not be the score a lender will see. You need to focus on taking care of unpaid debts, not just assuming that your unpaid medical bills will simply vanish away. The better your credit score, the better your chances of getting a good loan, so be sure that you keep this in mind when looking into your loan options.