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Bye, Bye, FICO: Mortgage Credit Scores are Changing

Thousands of First-Time Buyers May Become Eligible for Home Loans Under the New Score Models

Disclaimer: This post may contain affiliate links.

For nearly twenty years mortgage lenders have relied on classic FICO scores to determine the eligibility of consumers applying for home loans.

Now, an announcement made by the Federal Housing Finance Agency (FHFA) has warned us that things are about to change — and it may make it easier for thousands of people to buy a house.

Out With The Old

Up until now, Fannie Mae and Freddie Mac have used the Classic FICO score models 2, 4, and 5 to determine the credit worthiness of conforming home loan applicants.

But under the FHFA’s new regulations, Fannie & Freddie must use two new alternative credit scores: FICO 10T and Vantage Score 4.0

FICO 10T

FICO 10T is a newer credit scoring model that was introduced back in 2020. It differs from previous Classic FICO models in that it tracks trends over a period of 24 months or longer.

FICO 10T will take a lot more into consideration than previous models did, including your payment history over time and your credit utilization over time.

(Experian actually has a really good blog post that explains FICO 10T, you can view that here.)

VantageScore 4.o

VantageScore 4.0 is very similar to FICO 10T, in that it tracks trends data over time. It will also take into account any rental history or bill payment history if they have been reported to one of the big three bureaus.

VantageScore is actually joint effort between the “big 3” bureaus— Experian, Transunion, and Equifax.

Until recently, VantageScore hasn’t really been taken very seriously because lenders just didn’t use it. In fact, I myself even once referred to it as, “garbage”. I said this because since it’s inception it’s largely been used as a tool to drive unwitting consumers into marketing sales funnels.

VantageScore’s credit score models were also widely different from the models that lenders actually used at the time — FICO 8, 2, 4, and 5 — and this rendered them basically useless.

The new rule instituted by the FHFA changes the game though. VantageScore is no longer garbage, and it should absolutely be taken seriously.

How This Affects Consumers

If this all sounds like it’s a big deal, it is.

These new models will change how everyone’s credit scores are calculated. Some people’s score will go up and some people’s scores will go down.

And although thousands of people will benefit from these changes, everyone will need to stay vigilant in their good financial habits.

Because of the nature of trends data, it’s more important than ever to be consistently paying all of your bills on time, and making sure that your utilization rate is kept as low as possible.

So get started building a good track-record now.

There’s Still Questions

Even though the FHFA has given us fair warning that this transition will take place over the next few years, there are still plenty of unanswered questions.

I really want to know how lenders will be required to select a score. Currently lenders run all three FICO models — one from each bureau — and they then select the median score.

Though, what happens when we switch to the two score model?

There is no median score when only two numbers are present. So, will lenders pick the highest score or the lowest score? Will they average out the scores instead?

This is probably my biggest question — and it looks like we aren’t getting an answer to it just yet. Though, I’m hoping for more information over the next year or two.

Until the next update on this, here are some resources supplied by the FHFA and Fannie Mae:

FHFA Fact Sheet
https://www.fhfa.gov/Media/PublicAffairs/Documents/CS-Fact-Sheet-2022.pdf

FHFA Announces Validation of FICO 10T and VantageScore 4.0 for Use by Fannie Mae and Freddie Mac
 Washington, D.C. – The Federal Housing Finance Agency (FHFA) today announced the validation and approval of both…www.fhfa.gov

Credit Score Models
Fannie Mae tests and validates required credit score models for accuracy, reliability, and integrity. In accordance…singlefamily.fanniemae.com

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Disclosure: This post may contain affiliate links.

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This article was originally published on OhHeyItsRay.com

Oh Hey, It’s Ray is a real estate investor, entrepreneur, and former real estate agent. She lives happily with her husband and two children in the Pacific Northwest. See more from Ray at her YouTube channel and on Ohheyitsray.com