CreditShack.org

Qualifying for a mortgage is often a struggle for young homebuyers or anyone who has little credit history. Mortgage lenders won’t dole out the dough without seeing a good credit history. But the only way to build a good credit history is by getting a mortgage, loan or credit card! How can someone build his credit history if he can’t get credit?

Here’s the problem. The popular FICO scoring system is a reliable indicator of creditworthiness for people who have an established credit history, good or bad. Since the calculation is based solely on past credit history, it fails to distinguish risk between consumers with truly bad track records, and consumers with no track records at all. Sure, lending to the entire group of individuals with no credit history would be very risky. However, many individuals lacking credit history are perfectly responsible borrowers. The FICO scoring model lacks the capability to identify the millions of responsible borrowers that have no traditional credit history.

Here’s the solution. Last month, First American CREDCO announced its new Anthem Score, designed specifically to evaluate the creditworthiness of loan applicants with little or no traditional credit history. Low income families, first-time homebuyers and recent immigrants are often rejected for loans based upon insufficient credit history. The company expects that its new credit scoring method, which is based on non-traditional scoring ingredients, will help young homebuyers and homebuyers in under-served communities qualify for loans that they couldn’t have received otherwise.

The new scoring method has not been widely adopted. The first lender to implement the scoring system is MassHousing, a state-sponsored Massachusetts company like Fannie Mae that specializes in mortgages for first-time homebuyers.

Many lenders are likely skeptical of the new scoring model. If it proves to be a success, many other banks will follow suit. That’s good news if you’re a first-time homebuyer.