Why Credit Scores Are Fighting a Losing Battle in the Mortgage Market
Credit Scores are one of the building blocks of America's financial foundation. The majority of America's population is highly invested in developing and maintaining a high credit score in order to receive certain benefits and opportunities, one of which would be getting an approved mortgage loan for a home purchase. What many people don't realize is that the credit score system is failing in the modern mortgage game.
The classic monopoly
Credit scores are designed to help lenders know if a person will qualify for a mortgage loan. A high credit score allows lenders to gauge the responsibility levels of the person applying for the loan. For example, people with low credit scores most likely won't be as trustworthy paying back loans as people with high credit scores. Although credit scores are clearly an important part of applying and qualifying for a loan, they are losing their place of importance when it comes to modern day mortgage loans all because of one credit score monopoly.
Government-placed mortgage dominators, Frannie Mae and Freddie Mac, have made mortgage loans easier to obtain. Consequently, the Frannie Mae and Freddie Mac institution has required that only one credit score be used by lenders — the Classic FICO score which was established in the 1990s and has become the ultimate credit score monopoly. The issue that arises with the use of this one score system is that the Classic FICO scoring has fallen behind current credit data and is starting to produce inaccurate penalties regarding medical and non-medical bill payments, paid-off debt, and more.
The future with credit scores
Although there are obvious negative implications that accompany the fact that lenders are still using Classic FICO scoring, there doesn't seem any signs of a change. The Federal Housing Finance Agency (FHFA), the agency that manages the Frannie Mae and Freddie Mac bills, may switch to more modern systems, but nothing can be determined until another credit score company shows up. If competition arises between the Classic FICO score model and a hypothetical updated model, then the weight of credit scores might come back into play when it comes to obtaining mortgage loans.
Implementing this type of competition may be an inconvenience to those who have to deal with managing more than one model; however, the consumers who are the focus and end goal of the mortgage loan market will be able to experience the benefits of this change.
Why credit scores still matter
Regardless of the lack of credit score weight in the mortgage loan market, credit scores do still matter. Other life choices such as buying a car, renting a house or an apartment, or getting a new job can all be made easier with a good credit score. If you have a poor credit score, developing good credit habits and investing in a professional credit repair service might be the best way for you to get your credit where it needs to be. After all, missing out on all the benefits and opportunities that accompany a good credit score can definitely set you back in today's society.
Written by: Alayna Pehrson – Digital Marketing Strategist at Best Company