New Credit Score Formulas Were Recently Approved For Use By the Mortgage Industry!
For the past 20 years, Fannie Mae, Freddie Mac, and FHA have used the Classic FICO credit score model delivered by the three credit bureaus, Trans Union, Equifax, and Experian. (Each of these credit score models from the three bureaus is slightly different and proprietary, which is why a borrower’s scores from each bureau is slightly different.)
However, on October 24, 2022, the Federal Housing Finance Agency (FHFA) announced the approval of new scoring formulas – the FICO 10T and the VantageScore 4.0 – for use by Fannie Mae and Freddie Mac. Once implemented, mortgage borrowers can expect to see the following benefits:
- More accurate credit scores based upon more accurate and detailed credit data included within a borrower’s credit report.
- More inclusive data within borrowers’ credit reports. Enhancements consist of the inclusion of nontraditional payment histories such as rent, utilities and telecom payments when available.
- The requirement for a bi-merged credit report, rather than a tri-merged credit report. The industry standard has been the requirement for a tri-merged credit report, a credit report which incorporates data from all three credit reporting agencies. This new bi-merged standard is expected to reduce borrower costs and encourage industry innovation, without introducing additional risks to the mortgage lending industry.
It is hoped the FICO 10T and the VantageScore 4.0 credit models will lead to better outcomes for borrowers, lenders, as well as Fannie Mae and Freddie Mac. Since these new credit models are supposed to be more accurate than the credit score models currently in use, the mortgage market should ultimately realize an improved and more accurate view of risk.
The transition to using these new credit models is expected to take several years, as Fannie, Freddie, FHA, the credit agencies, and ultimately mortgage lenders update their software, policies, and underwriting guidelines.
Warren Goldberg is President of Mortgage Wealth Advisors, a Certified Mortgage Planning Specialist®, and a published author. His interviews include Blog-Talk Radio, Newsday, The Daily News, Anton Press, and the Long Island Herald. Since 1992, he’s been sharing his financial knowledge and wealth-building strategies, including how to properly use your mortgage as a financial tool. His clients regularly express their trust and appreciation by recommending friends and family call when in need of mortgage, real estate, and financial guidance.