Reminder: There's a Major Change to Mortgages Coming This Summer

Fannie Mae announced back in October that it wants to simplify the mortgage lending process for lenders and borrowers alike. Those changes are about to take effect, so here’s a quick brush-up on what to expect as you begin the mortgage approval process.

The mortgage giant has been steadily working toward widening lending standards in a stringent mortgage market. It previously launched HomeReady, a home loan program that lets low-income borrowers, among other things, include incomes from consumers who will be living in the home but not on the loan (such as a parent) to meet underwriting requirements.

Fannie Mae now plans to permit lenders to use verified employment and income information and trended credit card data supplied by the credit bureau Equifax in its underwriting processes.

That means that prospective homebuyers may no longer have to submit pay stubs when they apply for a home loan — a longstanding requirement of mortgage lenders. It also means consumers previously shut out of the housing market due to thin or so-so credit files may be able to get approved for a mortgage through the use of alternative data.

What Is Alternative Data?

Trended credit card data, which will also be provided for mortgage applications by TransUnion, provides lenders with a wider snapshot of borrowers’ spending habits. Financial institutions can see, for example, not just whether a person pays on time or what their balance currently is, but how much of a payment they are actually putting toward an account each month. These figures could make certain borrowers more appealing to lenders.

TransUnion estimates about 26.5 million consumers whose data can’t be scored under traditional models will have scores using its trended data, and 3 million of them fall into the prime or superprime categories.

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Fannie’s Mae support of these alternative data sources could spur widespread adoption in the mortgage market, given the government-sponsored mortgage financing company and its counterpart Freddie Mac buy, sell and back many of the home loans lenders make directly to consumers.

Even with these changes, you can increase your odds of securing a mortgage by keeping your debt obligations (including your potential new mortgage payment) below 43% of your annual income (the debt-to-income requirement associated with qualified mortgages) and your credit score above a 620 (Fannie Mae’s minimum score requirement.)

Of course, when it comes to credit scores, the higher, the better, since a stellar one will qualify you for the best mortgage rates. That’s why you may want to check your credit before you apply for a home loan. You can pull your free annual credit reports at AnnualCreditReport.com, and get two credit scores for free each month on Credit.com.

[Offer: If you’re trying to buy a home and are worried about errors on your credit reports, you can hire companies – like our partner Lexington Law – to manage the credit repair process for you. Learn more about them here.