To secure the best possible mortgage, would-be homebuyers often spruce up their personal finances a few months before applying with lenders. But a decision by the Federal Housing Finance Agency (FHFA) last October means you need to pay close attention to your credit usage now if you want a favorable mortgage years later.

That’s because the FHFA approved the FICO 10T and VantageScore 4.0 scoring models for use by Fannie Mae and Freddie Mac, meaning mortgage lenders must deliver both of these scores to the two agencies when selling their mortgages. The new models look at “trended credit data”, evaluating the borrower’s credit usage over a much longer period of time rather than what the current models dictate.

According to credit expert John Ulzheimer, formerly of FICO and Equifax, mortgage lenders will switch to the new models in the next 18-24 months. CNBC Select breaks down how the new scoring models will affect mortgage decisions — and what you should start doing right now to get a mortgage at a favorable rate in the future.

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How to prepare your credit for the new credit scoring models

Discover Credit Scorecard

  • Cost

  • Credit bureaus monitored

  • Credit scoring model used

  • Dark web scan

  • Identity theft insurance

Pros

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Experian Dark Web Scan + Credit Monitoring

On Experian’s secure site

  • Cost

  • Credit bureaus monitored

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If you have card debt, pay it down

Under the current scoring models used by lenders, you may have been carrying credit card debt for years, but so long as you pay it off a month or two before your mortgage application, you can still receive a good deal.

That all changes when lenders begin scrutinizing your credit with the new scoring models.

“You might want to start paying down your credit card debt now, because in two years, the scores that mortgage lenders use will be able to see back in time two years,” says Ulzheimer. “So paying off the month before, while still fantastic… is not going to yield the same benefit.”

One way to pay down your credit card debt is by using a balance transfer card. Applying for a card such as the Citi® Diamond Preferred® Card or the Wells Fargo Reflect® Card could net you a 0% APR period of up to 21 months on qualifying balances. That’s almost two years to make payments on your debt without having to also deal with interest charges.

Citi® Diamond Preferred® Card

  • Rewards

  • Welcome bonus

  • Annual fee

  • Intro APR

    0% for 21 months on balance transfers; 0% for 12 months on purchases

  • Regular APR

  • Balance transfer fee

    5% of each balance transfer; $5 minimum. Balance transfers must be completed within 4 months of account opening.

  • Foreign transaction fee

  • Credit needed

Wells Fargo Reflect® Card

On Wells Fargo’s secure site

  • Rewards

  • Welcome bonus

  • Annual fee

  • Intro APR

    0% intro APR for 18 months from account opening on purchases and qualifying balance transfers. Intro APR extension for 3 months with on-time minimum payments during the intro period. 17.49% to 29.49% variable APR thereafter

  • Regular APR

    17.49% – 29.49% variable APR on purchases and balance transfers

  • Balance transfer fee

    Introductory fee of 3% for 120 days from account opening, then up to 5% ($5 minimum)

  • Foreign transaction fee

  • Credit needed

Keep your credit utilization ratio low

To look your best to lenders using the new scoring models, keep your credit card balances low at all times. This will show consistency in your credit patterns and that you don’t rely heavily on your credit lines — both red flags to any institution considering whether to loan you hundreds of thousands of dollars.

The best practice is to pay your card balances in full every month. This will be good for your credit scores (no matter the model) and your budget, since you won’t have any interest payments cutting into your finances.

Why are the credit models changing?

What is a credit utilization ratio?

Your credit utilization ratio is the amount of revolving credit you’re using compared to the credit limit. For example, if you have a card with a $3,000 limit and a $300 balance, the ratio is 10%. It’s generally recommended to use less than 30% of your available credit to avoid damage to your scores.

FICO 10T and VantageScore 4.0, on the other hand, offer a much deeper view of how you manage your cards, according to Ulzheimer. Instead of looking at the snapshot of your current card usage, these models view how you’ve been managing your cards for the last two years. They check how often you pay off your balance, whether you’re consistent in how you use your card, and other factors that help lenders determine how you in general handle credit.

That’s why your card usage will become much more important if you’re hoping to become a homeowner. While this might seem like added scrutiny, it’s always beneficial to know and implement healthy credit card habits.

Bottom line

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.


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