How the Process of Getting a Mortgage Is Changing

Chris Wall, CPA/PFS, CFP®

Director of Financial Education

Last Updated
November 29, 2022

FAQs on the New VantageScore and FICO 10T Credit Scores

The Federal Housing Finance Agency (FHFA) recently announced it will begin requiring mortgage lenders to incorporate credit scores from VantageScore when evaluating potential borrowers. It will also require a transition to a new version of the FICO score (FICO 10T) for the first time in nearly 20 years. According to FHFA, the new models will “improve accuracy, strengthen access to credit and enhance safety and soundness.”1

Currently, mortgage lenders use the classic FICO model to evaluate borrowers’ creditworthiness. In 2018, Congress tasked FHFA with creating a process to validate and approve credit score models, which eventually resulted in the release of FICO 10T and the introduction of VantageScore 4.0.

What’s the difference between the previous credit scoring methods and the new scores?

One of the biggest differences in the new VantageScore method is that it includes information about a borrower’s utility, rent and phone payments. It also gives less weight to medical collection accounts, which, under the old FICO scoring method were treated the same as other types of collection accounts. In addition, tax liens and judgements are less heavily weighted than in previous calculation methods (although they can still have a significant impact on a borrower’s score).

The FICO 10T includes 24-month trending data that measures the direction a consumer has moved in relation to his or her debts. Those who have made progress in paying off debts will see an improvement in their score, while those who have taken on additional debt will experience a score reduction. The new model also differentiates between borrowers who use debt consolidation as a strategy to pay off their loans versus those who rack up more credit card debt after consolidating previous debt in a personal loan.

What’s the benefit of introducing new scoring methods?

According to FHFA, the new VantageScore and FICO methods will help improve:

  • Accuracy – The new models have undergone significant testing to ensure they accurately reflect borrowers’ credit histories and treat all borrowers fairly.
  • Inclusion – The new information reflected in these reports is intended to expand borrowing opportunities to those with limited credit histories.
  • Safety and Soundness – Because the new scores have proven to be more accurate than the classic FICO scoring, they’re expected to improve safety and security by providing an improved view of risk from two different credit score models.2

What does this mean for mortgage seekers?

The new credit scoring requirements could mean that an estimated 10.7 million more people will qualify for mortgages.23 This will be especially beneficial for those with less robust credit histories. The previous FICO score’s omission of key creditworthiness indicators, such as on-time rent and utility payments, disproportionately impacted low-income households, which have historically had less history of traditional borrowing.

When will lenders start using the new scoring models?

FHFA has stated the implementation of VantageScore and FICO 10T will be a multiyear effort. Once implemented, lenders will be required to evaluate both scores when determining a borrower’s creditworthiness.

What else has changed?

In addition to the new scoring methodologies, lenders will now be required to evaluate credit reports from only two of the three major credit reporting agencies. This change from three to two credit reports is expected to reduce costs and streamline the approval process.

Do you have questions on how the new scoring models may impact your credit score? Our teams are here to help. At Creative Planning, we help you navigate a wide range of savings, investing and borrowing challenges. To learn more, schedule a call with a member of our team.

Footnotes:

  1. https://www.fhfa.gov/Media/PublicAffairs/Documents/CS-Fact-Sheet-2022.pdf
  2. https://www.fhfa.gov/Media/PublicAffairs/Documents/CS-Fact-Sheet-2022.pdf
  3. https://vantagescore.com/press_releases/10-million-more-people-could-qualify-for-mortgages-thanks-to-new-credit-score-rule/
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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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