New Mortgage Credit Scoring Model

Your Mortgage Credit Score could be changing big time soon! This week, the Federal Housing Finance Agency (FHFA) announced that mortgage lenders will now be allowed to use VantageScore 4.0 for credit scoring. This ends a decades-long monopoly that FICO has held over credit scoring for mortgage purposes. Mortgage lenders were previously required to use FICO scores 2, 4, and 5 to pull credit on borrowers and make lending decisions. For many Texas home buyers & professionals, this change may seem like no big deal at first, but the inclusion of VantageScore 4.0 could actually have massive impacts on your ability to be pre-approved for a Texas mortgage; especially if you are a first time Home Buyer.

What is VantageScore 4.0 and Who Provides it?

When you apply for a mortgage, your lender will pull your credit report and receive a score from the 3 credit bureaus; Experian, Equifax, and TransUnion. The bureaus will provide your report, and they will each obtain a credit score from the Fair Isaac Corporation using their models known as “FICO Scores.” Because FICO has been the only option for mortgage decision-making, the scoring models have received criticism for a lack of innovation & increased costs. VantageScore was originally created in 2006 as a joint-venture between the 3 credit bureaus. Instead of relying on FICO, the bureaus themselves created VantageScore as a way for the bureaus to create credit scores for borrowers directly. The VantageScore models have been improving over the last almost 20 years, and now they are considered reliable enough by FHFA to be used for mortgage decision-making purposes. This could be great news for borrowers, especially Texas First Time Home Buyers, because VantageScore 4.0 has several key differences in the way that it calculates your credit score. Here are 4 big improvements we may see with the adoption of VantageScore 4.0…

4 Ways VantageScore 4.0 is Better For Homebuyers

Newly Established Credit Scores in 1 Month

Borrowers with newly established credit will have an easier time with VantageScore 4.0, because VantageScore 4.0 only requires you to have 1 tradeline for 1 month before it creates a credit score. This is a dramatic improvement, because currently FICO requires new borrowers to have 6 months of borrowing history before it will create a credit score. This makes buying a home take much longer for individuals who do not have active tradelines like credit cards. VantageScore will lower the wait-time for borrowers with newly established credit like immigrants and many young adults, which will make it easier for these people to buy homes in Texas and across the country.

Paying Rent Builds Your Credit Score

If you have a trend of responsible payment habits, then you will likely have a higher credit score when you mortgage company pulls your VantageScore 4.0 instead of FICO. This is because VantageScore includes trended data in its scoring model. Trended data on a credit report provides lenders with a more detailed and dynamic view of a borrower’s credit behavior over time. Instead of just a snapshot of the current credit situation, trended data reveals how a borrower manages their credit over an extended period. This is not limited to debt, and it also includes timely payment on bills like rent and utilities. The idea behind using trended data for mortgage credit scoring is that if a borrower has been paying their rent on time they are likely to also pay their mortgage on time. If you consistently pay more than the minimum balance on your credit cards, the VantageScore may be beneficial for you as well. We often see fluctuations in credit scores, because one month the card may have a larger balance than another month — even when you have been paying the balance in full every month. Trended data helps to lower the impact that these anomalies can have on your score.

Paid Collections Actually Disappear

VantageScore solves a HUGE PROBLEM that we have been dealing with since the dawn of FICO. With the VantageScore, when you pay off a collections account it gets completely removed from your credit score. The details of the account will remain on your report, but it will not be factored into the actual score. I cannot possibly explain in words how big of an improvement this is, and, in my opinion, it is a no-brainer. Let me explain how the system currently works. I know this, because I have personally witnessed this scenario play out for dozens if not hundreds of borrowers over the years.

With FICO, if you currently have an account in collections your FICO score will often remain low even after you pay off the account in full. For hypothetical example: Let’s say you owe $300 to AT&T for an old cell phone bill, and that collection account is keeping your score at a 650, when otherwise it would be 750. If you call up the debt collector and pay the account off, your score will stay at a 650 until the collection account naturally drops off your credit score. Isn’t that crazy? This creates no incentive for borrowers to pay off their collection accounts, and it actually punishes the borrowers who do pay off their accounts because they will still have a low credit score & less money available to pay other bills. VantageScore solves one of my biggest and most frustrating complaints about the credit scoring system with a common sense approach to paid collections. This is certainly great news.

A More Predictable Credit Score

Because the VantageScore is also used by banks for consumer credit decisions, the score your mortgage company will use for decision-making is likely to be much more predictable than the score mortgage companies currently use. When we pull credit without VantageScore, we are pulling FICO 2,4,5 models which are only used for mortgage purposes. This means that the score we use on your mortgage pre-approval is always different from the score you see when you visit your bank’s website, CreditKarma, or basically anywhere else. In my experience, the FICO scores are about 20 points lower than borrowers are expecting, on average, but the difference can be as much as 50 points higher or lower. We then have to explain to borrowers that their “mortgage credit score” is different from the credit score used everywhere else, and people rarely understand that.

With VantageScore 4.0, we are likely to pull a score that is much closer to – or maybe even exactly the same as – the score you see when you login to your bank & check your credit score. This will save everyone a lot of time and frustration, because people will have a more predictable outcome when their credit is pulled for mortgage pre-approval. The savings in time extends to loan officers as well, and I think this will result in savings across the board on mortgages. This differential in scores has cost our industry an incredible amount of time and resources.

The Implementation of VantageScore 4.0

     Even though the FHFA has announced the approval of VantageScore 4.0 as an acceptable credit scoring model, several institutions have work to complete before we can actually implement VantageScore 4.0 in mortgage lending. For example, the GSEs (Fannie Mae, Freddie Mac) still need to determine the process by which lenders can use these models for underwriting purposes. The credit vendors must also create their infrastructure to obtain reports with VantageScores, while also providing the option of FICO pulls. Institutions in the mortgage backed securities market will also have to determine methods by which VantageScore 4.0 underwritten loans may need to be categorized, if at all. Individual lenders and servicers need to develop processes for VantageScore 4.0 in their products and compliance procedures.

The adoption of VantageScore 4.0 for mortgage lending could be great news for home buyers in Texas and across the country. VantageScore presents a more nuanced and updated scoring model that contains common sense differences that set it apart from FICO. VantageScore makes it easier for new borrowers to establish credit, accounts for rent payments & other trended data, rewards borrowers for paying off collection accounts, and provides a more predictable credit scoring experience for home buyers. While the mortgage industry does have a length road ahead to implement VantageScore 4.0, this announcement represents the first step in a potentially massive improvement in the mortgage industry.

Are you considering buying a home in Texas? We can help you navigate all of the available loan programs to help you make the most educated decision possible.