Robert Magda: Why 'Transactors' Might Get Better Mortgage Terms Than 'Revolvers'

Tuesday, October 11, 2016

Why 'Transactors' Might Get Better Mortgage Terms Than 'Revolvers'

You may never have heard the terms transactor or revolver in relation to your credit habits.

But if you're hoping to qualify for a mortgage someday, your credit-paying habits, viewed over time, could be used by lenders to estimate how likely it is you'll repay your loan.

This could make a difference in the terms you're offered, say experts.

Simply put, transactors are those who pay more than the minimum due, or the entire balance due, on their credit accounts each month.

Revolvers, on the other hand, regularly make minimum payments and roll at least some of the credit balance to the next month.

Why it matters

Revolvers are three times more likely to default on new credit cards and auto loans than transactors, and five times more likely to default on current cards, a study by credit bureau TransUnion found.

Partial payers, those who actively pay down their balances, are typically less risky than “minimum” payers who pay only what they’re required to pay each month, a follow-up TransUnion study revealed.

And in the credit world, less risky (and thus more credit-worthy) borrowers may qualify for better loan terms, such as a lower interest rate.

Charting tendencies

Understanding credit habits over a longer period of time involves the use of "trended credit data," available from the credit tracking bureaus and already widely used in some consumer lending decisions, such as those for car loans.

Trended credit data gives lenders a longer look back - up to 30 months- at bill-paying habits so they can see if a borrower is continually and consistently making the minimum payments or paying more each month.

That's in contrast to the credit scores currently used in most mortgage decisions, which are based on a 30-day payment history and "do not distinguish between people who carry balances on credit cards and those who pay them off," notes Reuters journalist Liz Weston.

How that's changing

Starting in late September 2016, the trended credit data used to predict consumer credit behavior became available for mortgage lenders using Fannie Mae's Desktop Underwriter product, an underwriting technology tool used in the majority of mortgage lending decisions in the United States.

That may be good news for many consumers hoping to qualify for a home loan. Proponents say some responsible borrowers may score higher with trended data than they would have otherwise scored. And a higher score could lead to more favorable loan terms.

This could include "consumers who might not qualify for a mortgage because their credit reports contain too little information to generate a credit score," notes Washington Post syndicated columnist Kenneth Harney.

"Many of these would-be purchasers are first-timers - millennials just starting out on their careers. Others are individuals who simply do not make much use of credit but now need a mortgage," says Harney.

In fact, TransUnion research found that the percentage of consumers in its ‘Super Prime’ tier would increase from 12 percent to nearly 21 percent of the U.S. adult population with the use of trended credit data.

Improving your odds

Think you're ready to buy?

As a general rule, the new system will "benefit borrowers who regularly pay off revolving debt" and should "provide more creditworthy borrowers access to mortgage credit" according to Eric Rosenblatt, Fannie Mae's vice president of credit risk analysis and modeling.

With that in mind, borrowers might want to visit a HUD-approved housing counseling agency to see how their credit stacks up, and learn if they'll need to make improvements before speaking with a lender.

You can also investigate low down payment products, and research down payment assistance available in your area.

The extra effort could pay off in helping you find the right mortgage for you.

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Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.