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In October 2022, the Federal Housing Finance Agency announced new guidelines for the credit score models Freddie Mac and Fannie Mae can accept from mortgage lenders. While the changes may take time to be widely implemented, they could eventually have a substantial impact on groups that have historically been excluded from homeownership. These updated credit scoring models may allow more borrowers to qualify for mortgages. Here's what happened and how it could potentially benefit homebuying hopefuls.
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Replacing outdated credit score models
Freddie Mac and Fannie Mae are important to the home lending market because they buy mortgages from lenders, which frees up money for lenders to keep making home loans. But Fannie and Freddie can buy only conventional loans that meet certain standards, including for borrower credit scores.
The FHFA determines what credit scores Freddie and Fannie can accept, which in turn determines what scores mortgage lenders use when examining loan applicants. Because of this, mortgage lenders have long used FICO Scores 2, 4 and 5, which are considered outdated models. "The mortgage industry didn't have a choice in the matter. They were essentially forced to use older FICO scores by the FHFA," credit expert John Ulzheimer explained in an email. "All other types of lenders have long since moved on from those legacy scoring models."
Advantages of FICO 10T and VantageScore 4.0
The FHFA announcement had two major components. The big news is that lenders can now use a much more up-to-date FICO score — the FICO 10T — to evaluate borrowers and can also use a score from FICO competitor VantageScore. In addition, the FHFA will no longer require credit reports from all three major credit bureaus, allowing lenders to provide two out of three.
The adoption of FICO 10T and VantageScore 4.0 is the headline, though, because both models use trended data, which Ulzheimer describes as like seeing a multidimensional view rather than a flat image. Trended data looks at two years' worth of financial information rather than just a snapshot of the day the credit report was pulled.
Additionally, these models gather data from more sources, potentially including information like payments for rent, utilities or cell phone service. VantageScore may also be available to more borrowers because it requires a shorter credit history — as little as one month, compared with FICO's six-month minimum. VantageScore estimates it has scores for 37 million Americans who don't show up under FICO's guidelines and that of those, over 13 million have credit scores that are above 620, which is a commonly used threshold for mortgage lending.
Ideally, using both FICO 10T and VantageScore 4.0 provides a rounder view of a potential borrower's finances. But if a mortgage applicant doesn't have both, lenders can use one or the other. This could benefit borrowers who have a VantageScore but aren't on FICO's radar.
Why rent reporting matters for mortgage applicants
Using updated credit scoring models certainly doesn't sound exciting, but it could have significant implications for addressing the racial homeownership gap. The Urban Institute estimates that roughly 53 million Americans don't have FICO scores under the older scoring models. Underrepresented minorities are disproportionately likely to have no FICO scores: 29.5% of Black households and 27.3% of Hispanic households, compared with 16.7% of white households, according to Urban Institute analysis of 2018 data from Freddie Mac. These groups are also less likely to be homeowners — with lack of credit score information likely playing a role. Pew Research Center analysis of 2019 census data found that 58% of Black-led households are renters, as are 52% of Hispanic- or Latino-led households. In contrast, 27.9% of non-Hispanic, white-led households are renters.
More inclusive credit scoring models could help people who might not have previously qualified for a mortgage by taking into account information like rent payments. But this has been limited because little rental data is reported to the credit bureaus. For larger, institutional landlords, "reporting a large chunk of the data to the bureaus is relatively easy," says Jung Hyun Choi, a senior research associate with the Housing Finance Policy Center at the Urban Institute, a nonpartisan think tank. Choi notes that reporting isn't as easy for the "individual mom-and-pop landlords" who own the vast majority of small, one- to four-unit rental properties.
For those who are willing, there are rent-reporting services that landlords — and tenants — can use to make these payments visible to credit bureaus. Freddie Mac has begun a pilot program to incentivize rent reporting for "mom-and-pop" owners of multifamily housing; Fannie Mae also has a rent-reporting program.
But Choi says that adoption has been low among renters, not just landlords, because "a lot of people don't realize how reporting rent could help their credit scores and access to homeownership." Rent is typically the largest monthly payment in a family’s budget. And a history of on-time rent payments correlates with the ability to consistently pay a mortgage, so it’s meaningful data for a lender to have.
If tenants are reluctant to enroll because they worry about their ability to pay rent on time, Choi notes that rent-reporting programs often automatically unenroll tenants if they miss a payment so that tenants aren't doubly penalized if the missed payment goes to collections.
What you can do to become a stronger mortgage applicant
If you're one of the many Americans who might benefit from these new credit standards, there are a few steps you can take to help make yourself a better candidate for a mortgage.
Get a bank account
When you don't have much credit history, banking data can serve as an alternative source of information for lenders. Opening a bank account and using it to pay your bills can help you build a track record that shows mortgage lenders you're responsible with money. If you've been denied a bank account in the past, you could consider a second-chance checking account. But know that while your banking records can serve as a stand-in for credit data, bank accounts usually don't help your credit score.
Work on your credit
The minimum credit score to buy a house varies depending on what kind of mortgage you're using, but having a higher credit score can help you get a lower mortgage interest rate, saving you money. If you don't have a credit score, you can start building a credit history by becoming an authorized user on someone else's credit card or getting a secured credit card.
» MORE: Ways to improve your credit
Ask lenders which scores they use
FHFA anticipates the transition to the new scoring models to take years, so not all lenders will be working with FICO 10T and VantageScore 4.0 right away. When you're researching mortgage lenders, consider calling a loan officer and asking what type of scores they use (this information is unlikely to be available on their website). If you are working with a mortgage broker, they could help you find lenders that offer the updated scores.
Look for lenders that work with credit-challenged borrowers
If you're having trouble finding a lender that uses the newer credit scores, try looking for a lender that considers alternative credit data and offers manual underwriting. Alternative credit data often includes information that can be gleaned from your bank account, like your rent payments and overall cash flow. With manual underwriting, there may be more room for a person to evaluate your loan application on criteria that may not be accounted for in some lenders’ algorithms.