The Federal Housing Finance Agency (FHFA) announced this week that it has validated and approved two new credit scoring models for use by Fannie Mae and Freddie Mac, the two federally backed home mortgage companies.
Until now, both companies have relied on the classic FICO scoring model when assessing mortgage applications. Soon, both companies will also consider scores from the FICO 10T model and VantageScore 4.0. This could make it easier for homebuyers to secure a mortgage.
- The FHFA announced on Monday that it has validated and approved two new credit scoring models for use by Fannie Mae and Freddie Mac.
- Soon, both companies will also consider scores from the FICO 10T model and VantageScore 4.0.
- This could mortgages more accessible, and more affordable, for borrowers with no or low credit scores.
VantageScore 4.0 and FICO 10T
Until now, Fannie Mae and Freddie Mac – the two companies that buy and guarantee mortgages issued through lenders in the secondary mortgage market – have relied on just the classic FICO score to assess the creditworthiness of potential borrowers. As a result, the FICO score has become the dominant credit score across the mortgage market in the USA, being used in 90% of mortgage application decisions.
In a statement, the FHFA explained that their aim is to improve the accuracy of credit scoring models by taking into account a wider variety of payment histories. Both new credit scoring models incorporate data on rent, utilities, and telecom payments, all of which were often overlooked in the classic FICO score.
The FHFA expects that implementation of FICO 10T and VantageScore 4.0 will take a few years. Eventually, however, mortgage lenders will be required to deliver both credit scores to Fannie Mae and Freddie Mac when selling on their mortgages.
What It Means for Homebuyers
Consumer credit scores are a critical element when it comes to qualifying for a mortgage. Lenders use credit scores to assess whether borrowers can pay back the mortgage they are applying for, and borrowers with excellent scores can potentially qualify for the most competitive rates. For those looking for mortgage lenders with the lowest rates, it's important to first determine their credit score and understand how it is calculated.
There are several different scoring models that are used to calculate credit scores. In general terms, a credit reporting agency (such as Experian, TransUnion, or Equifax) uses a credit scoring model which looks at a consumer's payment history, the amount of debt outstanding, the percentage of the credit lines are being utilized, how many new credit inquiries have been made, and the type of credit that has been extended. The scoring models use this information to calculate the credit scores.
However, each scoring model assigns slightly different weights to these factors when calculating your overall score. The two “new” scoring model that have just been approved by the FHFA take into account a wider range of payment data than the model they are replacing.
This could be a game-changer for people looking to get a mortgage, and especially for lower-income and ethnic minority families. A 2021 report by the Urban Institute, for example, found that Black and Hispanic Americans are more likely to have no credit history or low credit scores and are also more likely to be renters. Using a credit scoring model that takes into account rent payments, such as both FICO 10T and VantageScore 4.0, could allow these families to build their credit score faster, and ultimately qualify for a mortgage.
Correction—Dec. 2, 2022: This article has been edited from a previous version that failed to specify that credit reporting agencies use a credit scoring model to provide credit scores and do not calculate them.