Credit averaging combines credit score for two or more borrowers

The rules have changed when it comes to credit scores playing a major role in applicants getting approved for a mortgage loan. Potential borrowers— with less than stellar credit— now have a chance to qualify for a loan, thanks to Fannie Mae’s updated automated Desktop Underwriter® system.

Changes to the system were designed to tap into electronic bank statement data to consider strong rent payment history and create new opportunities for homeownership while also promoting safe lending practices. Of course mortgage applicants must grant permission for their history to be identified through some type of payment portal or other digital payment solution.

More importantly, while consistent rent payments will improve potential borrowers’ chances of being approved for a loan, records of missed or inconsistent rent payments identified in the bank statement data won’t hurt their ability to qualify for Fannie Mae-eligible loans.

Fannie Mae also updated their eligibility assessment to include credit averaging. With credit averaging, loans with two or more borrowers can use their average median credit score for meeting the minimum score requirement of 620.

Credit averaging is important because multiple borrowers can team up and take advantage of qualifying for a conventional loan—when it’s not possible to qualify independently.

Following is a simple example of how credit averaging works. Think A + B = C.

1. John applies for a loan and gets a higher interest rate.
2. Sally applies for a loan and qualifies for fewer programs that may include conventional, FHA or USDA loans.
3. John and Sally apply for a loan together and have more loan options available to them.

Once the representative credit score is established, it will continue to be used for pricing and mortgage insurance requirements (if required).