Fannie Mae and Freddie Mac are considering adopting new credit scoring procedures by the end of the year that will make it easier for a person with no credit or a non-traditional credit history to meet the requirements for a home loan.
Why are they considering the changes?
The current FICO credit scoring system was stablished in 1956 and is used by banks to decide how likely someone is to pay off their debt. The challenge is that the current system is no longer an accurate representation as to whether someone is responsible enough to meet their financial obligations.
What is the benefit of this change?
Right now, the American home ownership rate is at 63.4 % (a 48-year low) and the Hispanic home ownership rate is at 45.4% (a 14-year low).
According to an article in Latino Fox News:
“The new credit score model would allow 7.6 million new customers (including 2.4 million Hispanics and African Americans) to qualify for a mortgage”.
Why is this important to the Hispanic community?
New Hispanic households accounted for 40% of U.S household growth in 2014 (the largest share of any ethnic group). 70% of the Hispanic home buyers are first time home buyers and many of them don’t have a credit history. As we mentioned in a previous blog: Hispanics are more likely to be credit invisible, especially first and second generation Hispanics who don’t feel comfortable borrowing a lot of money because of their experience with the financial institutions in their countries. They prefer to pay cash if possible.
This is a community that is very conservative and careful with the way they manage their money. However, under the current FICO credit scoring system they are being punished instead of being helped in their pursuit of the American Dream of home ownership.