Two major changes in the mortgage market go into effect this month, and both could help millions more borrowers qualify for a home loan, CNBC reports.
First, the nation’s three major credit rating agencies, Equifax, TransUnion and Experian, will drop tax liens and civil judgments from some consumers’ profiles if the information isn’t complete.
Of about 220 million Americans with a credit profile, approximately 7% have liens or civil judgments against them. With these hits to their credit removed, their scores could go up by as much as 20 points, a study by credit rating firm Fair Isaac Corp says.
“It’s a significant impact for still a very large number of people,” says Thomas Brown,  LexisNexis’ senior vice president of financial services, who is concerned  the move will add significant risk to the mortgage system. “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.”
Secondly, mortgage giants Fannie Mae and Freddie Mac are allowing borrowers to have higher levels of debt and still qualify for a home loan. The two are raising their debt-to-income ratio limit to 50% of pretax income from 45% to help those with high levels of student debt. That means consumers could be saddled with even more debt, heightening the risk of default, but the argument for it appears to be that risk in the market now is unnecessarily low.
“In this case, we’re changing the underwriting criteria, and we think the additional increment of risk for making that change is very small,” says Doug Duncan, Fannie Mae’s chief economist. “Given how pristine credit has been post-crisis, we don’t feel that is an unreasonable risk to take.”
