Fannie Mae and Freddie Mac will use alternative credit scores: what it means for homebuyers
NASHVILLE — The federal government is expanding how it collects credit scores, which could allow more Americans to potentially buy homes.
The Federal Housing Finance Agency announced at the Mortgage Bankers Association annual conference on Monday that it has approved two credit score models, the FICO 10T and the VantageScore 4.0, for use by Fannie Mae and Freddie Mac.
“Companies have long relied on classic FICO, and it has met their basic needs,” said Sandra Thompson, director of FHFA in Nashville, Tennessee, but “it’s time to recognize the important innovations that have occurred in credit score modeling.”
Fannie and Freddie were institutions created by Congress and are federally backed mortgage institutions. They guarantee most mortgages made in the United States, so many lenders follow the rules set by Fannie and Freddie when making mortgages to borrowers.
For the past two decades, Fannie Mae and Freddie Mac have relied on scores created by FICO, or Fair Isaac Corp. FICO,
understand borrowers’ ability to repay mortgages. Credit scores don’t just affect loan underwriting, they also impact loan pricing, pooling, investment disclosures, and more.
In 2017, a Senate bill proposed that agencies adopt alternative scoring models, not least because traditional credit scores like those created by FICO only consider whether borrowers have paid debts such as debts. mortgages and credit cards.
With FICO 10T and VantageScore 4.0 replacing Classic FICO, the belief is that reported credit scores will be more accurate and inclusive, the FHFA said.
Both FICO 10T VantageScore will look at a broader range of payment history data for borrowers, from cellphone bills to utility and rental payments, to determine creditworthiness.
The more accurate the credit scores, the better the understanding of risk the market and investors get. It also potentially expands access to credit for borrowers with “weaker credit histories,” Thompson said.
The FHFA ruling has been in the works for a long time, Chi Chi Wu, an attorney at the National Consumer Law Center, told MarketWatch.
“We’ve been working on this since 2014, urging the FHFA to update the credit scoring models,” Wu said. kick in the box.”
“So this particular decision is good… [because] credit scoring models should have been updated a long time ago,” Wu added.
According to a 2015 study by VantageScore, using credit scores beyond FICO would open access to credit to approximately 72,000 additional households each year.
Additionally, 16% more Hispanic and African American households would have expanded access to mortgages.