Beginning July 1st, the credit reporting bureaus (Equifax, Experian, TransUnion) will begin wiping tax liens and judgments off of millions of credit reports in a bid to improve accuracy.
The backstory is that a lot of errors were showing up on credit reports, hurting Americans’ credit scores and preventing them from getting financing, including mortgages in some cases.
As a result of this less-than-stellar data collection, the big three bureaus launched the so-called National Consumer Assistance Plan (NCAP).
The stated goal of the organization is to make credit reports “more accurate, transparent, and understandable.”
The most recent highlight is the removal of tax liens and judgments from credit reports, which could significantly boost credit scores for lots of consumers.
Basically, if a minimum amount of personally identifying info (name, date of birth, social, address) doesn’t accompany the entry, it will be removed. The same goes for judgments, which must be checked every 90 days or get removed.
Millions of Credit Scores Will Soon Go Up
Per a FICO study, “hundreds of thousands” of borrowers will see their credit scores rise anywhere from 40 to 60 points or higher because of the change.
Apparently 300,000 will see scores rise 60 points or more, and 700,000 will see scores rise 40 points or more.
An additional 1 to 2 million could see credit scores jump 20 to 39 points as a result.
However, most of those affected may only see a modest increase, from one point to 19 points higher.
And it should be noted that somewhere between 93% and 94% of all Americans don’t have a tax lien or judgment on their credit report.
Still, for those who are affected, it could mean the difference between a mortgage and no mortgage, and that’s a big deal.
Tax Liens and Judgments Make It Hard to Get a Mortgage
Aside from the expected credit score increase, which could push some borrowers from ineligible to approved, the removal of derogatory items like tax liens and judgments could pave the way to homeownership. Or allow a struggling borrower to refinance to a lower mortgage rate.
For example, Fannie Mae requires tax liens and judgments to be paid off at or prior to closing if they “have the potential to affect Fannie Mae’s lien position or diminish the borrower’s equity.”
When it comes to FHA loans, the same rule applies unless the borrower enters into a satisfactory repayment plan and verifies it in writing (and makes at least three months of scheduled payments).
The tax lien may then remain unpaid if the lien holder agrees to subordinate the tax lien to the FHA-insured mortgage.
Regardless, the presence of a tax lien or judgment could jeopardize your mortgage application simply because it could eat into your debt-to-income ratio.
If there’s a payment plan, expect that monthly obligation to be counted against you, assuming you’re allowed to proceed. And that might limit how much you can afford.
Is This a Risky Move by the Credit Bureaus?
This move isn’t without its criticism. The big fear is that the credit bureaus might be too willy-nilly about removing important data that identifies risk.
The aforementioned FICO study also discovered that 92% of borrowers with tax liens and/or judgments also have other negative items on their credit reports, and the median score for such individuals is a very low 565.
That could give these folks an artificial boost and put them in the running for a mortgage when a lender otherwise wouldn’t want anything to do with them.
It just so happens that 620 is the subprime cutoff, and 565 plus 60 is just enough to get over that hurdle.
Still, for those who were wrongly dragged down due to dubious data, this is a godsend and will provide thousands with the opportunity to buy a home (at least based on their credit alone).
It could also boost origination volume at a time when it’s expected to slow, though the prevalence of low mortgage rates continues to surprise the industry and prop up the numbers.
Keep an eye on your credit report next month to see if this change positively affects you!