FHFA to change credit score model for new mortgages

The Federal Housing Finance Agency (FHFA) announced Monday at the Mortgage Bankers Association's (MBA) annual conference in Nashville that it will begin using new credit scoring models for borrowers looking to take out a mortgage or a mortgage refinance.

The FHFA approved FICO 10 T and Vantage Score 4.0 as the new credit scoring models for conventional mortgages, or loans backed by Fannie Mae and Freddie Mac. 

"Today’s decision will benefit borrowers and the enterprises, along with maintaining safety and soundness," FHFA Director Sandra Thompson said. "While implementing the newer credit score models is a significant change that will take time and require close coordination across the industry, the models bring improved accuracy and a more inclusive approach to evaluating borrowers."

The switch is expected to be a multi-year effort as the FHFA works with industry stakeholders to shift to the new credit score models, the agency said. 

If you are looking to take out a mortgage or refinance, comparing multiple lenders could help you find the lowest interest rate available and save money. You can visit Credible to find your personalized interest rate without affecting your credit score.

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Credit scoring models updated for the first time in 20 years

For the last 20 years, mortgage lenders have been required to use the Classic FICO model. This has persisted despite the creation of many newer credit models that other types of lenders have begun using. 

But now, the newly-announced models will improve accuracy by capturing new payment histories for borrowers when available, including rent, utilities and telecom payments, according to the FHFA. FICO’s new model even taps into trended data, which offers a historical view such as account balances for the previous 24 months, giving lenders more insight into how individuals are managing their credit. And because more data is available, more homebuyers can potentially qualify for a mortgage. 

"Compared to the prior version of the FICO Score used by the enterprises today, FICO Score 10 T can enable an increase in mortgage originations of up to 5% (without taking on additional credit risk) or reduce default risk and losses by up to 17%," FICO stated. "These improvements in predictive power can help mortgage lenders safely avoid unexpected credit risk and better control default rates, while making more loans to more consumers."

Previously, FICO’s credit score had been the only one accepted by Fannie Mae and Freddie Mac. But now, another credit score model will also be accepted: Vantage Score. 

"FHFA’s decision to allow VantageScore to compete in mortgage ushers in a new and more equitable era of financial inclusion," Silvio Tavares, Vantage Score president and CEO, said. "Owning a home remains one of the most important ways Americans build wealth and financial security. FHFA’s action will enable millions more credit-worthy Americans to have access to mortgages by using VantageScore’s more predictive credit score."

If you are considering buying a home or refinancing your current loan, you can visit the Credible marketplace to compare multiple mortgage lenders at once and find the product that works best for your needs.

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Credit score changes could allow more potential homebuyers into the market

In addition to the new credit scoring models, the FHFA will now only require mortgage lenders to obtain two credit reports from the three national credit agencies: TransUnion, Experian and Equifax. This is a shift from the previous requirement that made lenders get credit reports from all three bureaus. 

These new changes are expected to create more opportunities for homebuyers to enter the housing market. 

"The announced updates on credit scoring models should help broaden the scope of eligible borrowers and expand access to homeownership for underserved communities," MBA President and CEO Bob Broeksmit said. "MBA supports competition in the credit scoring space, and we will work with FHFA to ensure costs and the implementation process are monitored to mitigate unintended consequences to lenders and borrowers."

If you are interested in purchasing a house or refinancing your current mortgage, you can speak to a home loan expert at Credible and get all of your questions answered.

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