Federal Housing Finance Agency Approves Two New Credit Rating Models
The Federal Housing Finance Agency (FHFA) announced this week that it has validated and approved two new credit score models for use by Fannie Mae and Freddie Macthe two federally backed mortgage lenders.
So far, both companies have relied on the classic FICO scoring model when evaluating mortgage applications. Soon, the two companies will also take into account the scores of the Model FICO 10T and VantageScore 4.0. This could make it easier for homebuyers to get a mortgage.
- The FHFA announced Monday that it validated and approved two new credit scoring models for use by Fannie Mae and Freddie Mac.
- Soon, the two companies will also consider scores from the FICO 10T and VantageScore 4.0 model.
- This could make mortgages more accessible and affordable for borrowers with no or low credit scores.
VantageScore 4.0 and FICO 10T
So far, Fannie Mae and Freddie Mac – the two companies that purchase and guarantee mortgages issued by lenders in the secondary mortgage market – relied solely on the classic FICO score to assess the creditworthiness of potential borrowers. As a result, the FICO score has become the dominant credit score in the US mortgage market, being used in 90% of mortgage application decisions.
In a statement, the FHFA explained that its goal is to improve the accuracy of credit scoring models by accounting for a wider variety of payment histories. Both new credit scoring models incorporate data on rents, utilities, and telecommunications payments, all of which have often been overlooked in the classic FICO score.
The FHFA expects the implementation of FICO 10T and VantageScore 4.0 to take a few years. Eventually, however, mortgage lenders will be required to provide both Fannie Mae and Freddie Mac credit ratings when selling their mortgages.
What this means for homebuyers
Consumer credit scores are a critical component when it comes to qualifying for a mortgage loan. Lenders use credit scores to assess whether borrowers can repay the mortgage they apply for, and borrowers with excellent scores can potentially qualify for the most competitive rates. For those looking mortgage lenders with the lowest rates, it’s important to determine their credit score first and understand how it’s calculated.
There are several different models that are used to calculate credit scores. Typically, a credit reporting agency (like Experian, TransUnion, or Equifax) will look at a consumer’s payment history, amount in debt, percentage of lines of credit used, number of new credit applications made, and the type of credit granted.
However, each scoring model assigns slightly different weights to these factors when calculating your overall score. The two “new” scoring models that have just been approved by the FHFA take into account a wider range of payment data than the model they replace.
This could be a game-changer for people looking to get a mortgage, and especially for low-income and ethnic minority families. A 2021 report from 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 rent.. Using a credit score model that takes rent payments into account — like FICO 10T and VantageScore 4.0 — could help these families build their credit score faster and ultimately qualify for a mortgage.