What you need to know about the FICO 10T and VantageScore 4.0 models and their potential Positive impact on homebuyers
New FICO Score Models for Home Loans
Attention future homeowners: buying a home just got a little easier. On October 24, 2022, The Federal Housing Finance Agency (FHFA) recently approved two new credit scoring models for use by Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that guarantee most mortgages in the U.S..
The FICO 10T and VantageScore 4.0 credit score models have been authorized for use, replacing the classic FICO scoring model that’s been the standard for nearly two decades. These new models aim to improve accuracy by taking into account borrowers’ full payment histories, including rent, utilities, and telecom payments.
However, these changes won’t take effect immediately. There is a scheduled “multiyear transition period,” and after that, participating lenders will be required to deliver loans with both scores when available.
While both FICO and VantageScore provide consumers with three-digit credit scores based on information in their credit report, they vary slightly in how they are calculated and the ranges they provide their customers. FICO categorizes credit scores from poor to exceptional, with scores above 670 considered “good” and scores below 580 considered “poor.” In contrast, VantageScore credit scores can fall within a few different categories, ranging from subprime (300–600) to superprime (781–850). The higher your score, the better.
Both scoring models consider factors like payment history, amounts owed, how much credit you’re using, new credit inquiries, and credit mix. However, each scoring model assigns slightly different weights to these factors when calculating your overall score.
Maintaining a good credit score across both scoring models will require you to practice positive credit habits like making on-time payments, keeping your credit utilization under 30% of your available credit, and being selective about new credit applications. Your credit score plays a significant role in your ability to secure a mortgage and favorable terms like a low interest rate.
FHFA Announces Inclusion of Rental Payment History in Fannie Mae’s Underwriting Process
In addition to these new scoring models, the FHFA announced a change in credit reporting requirements for lenders. Currently, Freddie Mac and Fannie Mae require that lenders provide credit reports from all three consumer reporting agencies—TransUnion, Equifax, and Experian. Instead, lenders will have to provide credit reports from just two of the three agencies.
This change in credit scoring and reporting requirements could potentially help create an easier path to homeownership. The Urban Institute reported that Black and Hispanic Americans are more likely to have no or low credit and are more likely to be renters. The more robust credit-scoring model could help even the playing field for borrowers with thinner credit profiles.
Additionally FHA and HUD have recently made changes to their homeownership programs, such as offering additional credit consideration for “positive rental history.”
To expand access to credit in a safe and sound manner, the Federal Housing Finance Agency (FHFA) today announced that Fannie Mae will consider rental payment history in its risk assessment processes. With the update to Fannie Mae’s systems, future borrowers will have the benefit of a positive rental payment history being included in an underwriting decision. so that buyers with limited credit histories can more easily obtain home loans. There is no additional burden – either for the borrower or for the lender – to make use of this feature.
Future borrowers now have the benefit of a positive rental payment history being included in an underwriting decision with Acting Director Sandra L. Thompson saying,
“For many households, rent is the single largest monthly expense. There is absolutely no reason timely payment of monthly housing expenses shouldn’t be included in underwriting calculations,” said Acting Director Sandra L. Thompson. “With this update, Fannie Mae is taking another step toward understanding how rental payments can more broadly be included in a credit assessment, providing an additional opportunity for renters to achieve the dream of sustainable homeownership.”
Freddie Mac adjusted its Desktop Underwriter system to identify rent payments in mortgage applicants’ bank records. This is notable because Desktop Underwriter is an automated system used by Freddie Mac and sometimes the FHA for mortgage underwriting that calculates if a loan meets approval requirements. This means they have actually incorporated rental history into their automated business process to approve mortgages.
HomeOwnership Programs
There are various homeownership programs available, such as the FHA loan, which requires a credit score of at least 580, and the VA loan, which does not require a minimum credit score. Some lenders may also offer their own programs that cater to first-time homebuyers, low-income families, and those with less-than-perfect credit.
To check your credit score, there are several ways you can do so. Credit scoring services like Credit Karma or Credit Sesame can give you regular updates on your score and any major changes. Requesting your score from one of the major credit bureaus—Experian, TransUnion, and Equifax—is also an option, although some may require you to pay a fee. Experian Boost is a free product that allows you to track your credit score and can help you raise your FICO score since it connects to your bank account and gives you credit for paying everyday bills, like your utilities or rent, on time. Checking with your bank or credit card issuer can also provide you with a free credit score.
Your credit score plays a key role in the likelihood that you’ll be approved for financing and the costs associated with borrowing money. Knowing your credit score and how lenders evaluate it is critical to hitting all of your major financial goals, including homeownership.
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