New FHFA Credit Scoring Model Could Help More Homebuyers Qualify for a Mortgage

What Are the New FHFA Scoring Changes?

In October 2022, the FHFA announced two significant new changes:

• Lenders will have to provide both the FICO 10 T and VantageScore 4.0 credit scores to Fannie Mae and Freddie Mac when the GSEs purchase the lenders’ mortgage loans. Lenders have been using the FICO 2, FICO 4 and FICO 5 models (one for each credit bureau), collectively called classic FICO scoring models, for nearly 20 years.
• Lenders will only be required to provide credit reports from two of the three national credit reporting agencies to Fannie Mae and Freddie Mac. Mortgage lenders receive a merged credit report that can have credit scores based on each of your credit reports (from Experian, TransUnion and Equifax), along with overviews of the information for lenders. Once the change happens, lenders will receive a bi-merge rather than a tri-merge report.

These changes are significant because mortgage lenders usually don’t keep your loan on their books. Instead, lenders make money from the closing costs and by selling the mortgages to Fannie Mae and Freddie Mac. That frees up money that allows them to issue new loans.

While mortgage lenders can set their own criteria for mortgage approval, they have to at least meet the GSEs’ minimum requirements for conforming loans if they want to sell the mortgage to a GSE. About 50% to 60% of mortgages get sold to the GSEs, which is why the FHFA’s changes could impact many future homeowners.

What Are the FICO 10 T and VantageScore 4.0 Scores?

FICO 10 T and VantageScore 4.0 are credit scoring models developed and sold by FICO and VantageScore, respectively. Credit scoring companies periodically release new scoring models that incorporate changes in consumer behavior and the availability of new financial products or technology.

Similar to the classic FICO Scores, FICO 10 T and VantageScore 4.0 are still based entirely on the information in one of your credit reports. But they weigh information differently and may consider more information than FICO classic models, such as:

• Trended data: The newer credit scores consider how you’ve managed your credit accounts over the previous 24 months; for example, whether you’ve been consistently revolving a credit card balance or paying it off in full each month.
• Rental data: If your rent payments are reported to the credit bureaus (you can use Experian Boost to add rent payments to your Experian report), they can impact newer scoring models, including FICO 10 T and VantageScore 4.0.
• Collection accounts: These models also treat medical and non-medical collection accounts differently and ignore medical collections when calculating your score.

Because credit scores are largely based on the same underlying information in your credit reports, the models tend to move in tandem. For example, missing a payment could hurt all your scores while paying your bills on time and having a low credit card balance could help them all. But even minor differences, such as additional information considered by the FICO 10 T and VantageScore 4.0 scores, can be important, especially when you’re applying for a large loan like a mortgage.

How the Newly Allowed Credit Scores Could Help Homebuyers

It can take time to install and test a new scoring model, and lenders will have several years to transition to the new credit scores. As a result, homebuyers won’t see any changes right away. But once the changes are implemented, the new scores may allow for:

• Expanded access to home loans: The newer scoring models may help some people who otherwise wouldn’t qualify for a mortgage get a home loan. FICO estimates lenders could expand approval rates by 5% without taking on additional risk using the FICO Score 10 T. And VantageScore says it can score over 10 million consumers who might qualify for a mortgage but aren’t scorable by competitors’ models.
• Lower interest rates for borrowers: Some people will receive higher credit scores with the newer models, and they may qualify for a mortgage with a lower interest rate as a result. Lower rates will reduce your monthly payment and save you money.

Some lenders may already use newer scoring models if they’re issuing loans they don’t plan to sell to the GSEs. For example, the GSEs don’t buy jumbo loans (mortgage loans for more than the FHFA limit), so lenders can choose to use whichever scoring models they prefer for those loans. But about half of all mortgages are sold to the GSEs, and the changes could be significant for millions of people who are buying a home or refinancing their mortgage.

How to Prepare to Apply for a Mortgage

Your credit scores are an important part of your mortgage application, but only one piece of the puzzle. If you’re getting ready to buy a home, also take time to:

• Review your credit report. All your credit scores are based on your credit report, and you’ll want to make sure there aren’t any errors in your report that could hurt your score. If you find something amiss, you can submit a dispute.
• Improve your debt-to-income ratio (DTI). Lenders will also consider your DTI, which compares your monthly income and bill payments, to determine whether you can afford a mortgage. Increasing your income or paying off loans and credit cards can lower your DTI and help you qualify.
• Get your documents ready. Review the list of required documents and start gathering copies to have on hand for the mortgage lender.
• Try to get preapproved. Shop around and try to get preapproved with several lenders to see which ones offer you the best terms.

With the credit score changes in mind, you may also want to pay extra attention to your credit card bills in the coming months. Regularly paying your bills in full, or paying down your balance over time, might help your credit scores when the models consider your trended credit card payment history.

The Bottom Line

While it will take several years for the changes to be fully implemented, mortgage lenders will be changing the scoring models they use for many mortgages. It can be helpful to understand how these changes can impact your mortgage application and to monitor your credit in the interim. Experian’s free credit monitoring comes with a FICO Score 8, which isn’t used for mortgages but is the most widely used FICO Score.