February 19th, 2018 6:42 AM by Jackie A. Graves, President
Changes to the way credit scores are calculated are on
the horizon, and for many prospective homeowners, this could be a good thing.
For many years, Fannie Mae and Freddie Mac, the
government-controlled entities that guarantee U.S. mortgage loans, have
required lenders to base creditworthiness of prospective borrowers on FICO scores. Non-bank
lenders have argued that the FICO scoring model — which aims to predict
how likely consumers are to repay their loans based on factors including credit
history — is too restrictive. These non-bank entities say that by using only
the FICO scoring model, millions of potential borrowers are being excluded from
the mortgage market.
Now, there is a proposal from the Federal Housing Finance
Agency (FHFA) to open up the housing market by also using the VantageScore as a measure for extending home loans to
borrowers. Last month, the FHFA asked lenders to chime in on the
issue. If changes are made it would mark the first time in nearly
two decades that there has been an overhaul to the way credit is scored.
including the VantageScore model, created by Equifax, Experian and TransUnion,
more borrowers would be likely to qualify for mortgages. VantageScore says it
could assign credit scores to 30 million more people than FICO and potentially
make 7.6 million more people who use little to no credit eligible for a mortgage.
something just because you’ve always done it that way isn’t a good enough
reason,” Mat Ishbia, CEO of United Wholesale Mortgage, told The Wall Street
score is more widely used than VantageScore currently, and its use extends
beyond mortgages. FICO scores are used by 90 of the top 100 largest U.S.
financial institutions in making consumer credit decisions. FICO scores range
from 300 to 850, with 300 being very poor and 850 being perfect. A credit score
of 690 is in the high range of average. But a score above 720 will help
borrowers secure the lowest mortgage interest rates
five criteria to calculate credit scores, and each is weighted differently:
Payment history, or your record of repaying your debts in full and
on time = 35 percent
The amounts you owe on credit accounts, or the ratio of available
credit to how much credit you’ve used = 30 percent
The length/age of your credit history accounts = 15 percent
The amount of new credit for which you’ve applied = 10 percent
The different types, or mix of credit you have = 10 percent of
While there are some loans available to
borrowers with credit scores below 690, some government-backed loans such as FHA, require a minimum score of 580 or the borrower is
required to put at least 10 percent down on the loan.
was established in 2006 by the three credit bureaus — Experian, TransUnion, and
Equifax with the goal of providing “a more consumer-friendly alternative” to
the FICO score, but it is not yet as widely used.
a VantageScore ranges from 300 to 850, but the score focuses on some
non-traditional information and places less emphasis on some of the factors
that go into FICO scoring, for example, available credit. VantageScore places
the highest emphasis on payment history, and age and type of credit. It places
less emphasis on factors like recent behavior, including new credit accounts
opened, and on the amount of unused credit available to a borrower.
responding to the proposed changes in the way mortgage creditworthiness is
measured, FICO was quick to point out that its model is independent of the
three credit reporting companies.
welcomes competition — we just want to have fair competition,” said Joanne
Gaskin, senior director at the company. She also questioned whether lenders
would expand credit responsibly simply by switching to VantageScore.
FICO said it has a newer version of its model, which aims to provide a more
sophisticated analysis of creditworthiness than the system currently used by
Fannie Mae and Freddie Mac.
welcome the potential changes, which could put home ownership within reach of
more Americans, some banks worry that a change could loosen lending standards
too much, resulting in more mortgage defaults.
nothing has been finalized and the FHFA said it will seek comment on the issue
until February. Until that time, it will continue to consider different
options, including using scores from both FICO and VantageScore or giving
lenders a choice.
If your credit score has stopped you from becoming a
homeowner, you may want to look into credit repair. By
repairing your credit and improving your credit score now, you’ll have a much
better chance of qualifying for a mortgage no matter which scoring model your
If you’re concerned about your credit, you can check your three credit reports for free once a
year. To track your credit more regularly, Credit.com’s free Credit Report Card is an easy-to-understand
breakdown of your credit report information that uses letter grades—plus you
get two free credit scores updated each month.
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