(TheDailyCurrents.com) – A new credit score rule passed in late 2022 changed the landscape for mortgage borrowers. According to the Federal Housing Finance Agency (FHFA), the new FICO score will incorporate information about the borrower’s utility, rent, and phone payments. The new FICO rule is critical because it will impact lending decisions and borrowers looking for mortgages.
FICO is an abbreviation of the Fair Isaac Corporation, a pioneer in developing a way to calculate credit scores based on the information gathered by credit reporting bureaus.
For the first time in nearly 20 years, the FHFA has introduced new FICO credit score changes, meaning that mortgage lenders will also need to adapt and possibly change the way they approve applications. The FHFA announced a new requirement for mortgage lenders to validate and approve both the VantageScore 4.0 credit score and the FICO 10T credit score models for use in Freddie Mac and Fannie Mae enterprises.
According to FHFA’s Director Sandra L. Thompson, the new decision is set to benefit enterprises and borrowers, as well as maintain safety and soundness. FHFA expects lenders to include credit scores from VantageScore to evaluate their potential borrowers. The new models allow improved accuracy and create a more inclusive approach to evaluating borrowers.
The previous FICO model didn’t capture factors like utility payments and on-time rents, which the previous manual underwriting process included. The exclusion of such factors affected households with less history of borrowing, particularly the black community.
With the previous model, lenders relied on credit scores and credit history to determine the eligibility of mortgages and loan pricing, which meant that people with no history of traditional borrowing were disproportionately affected.
But with the new FICO changes, VantageScore estimates that about 37 million people that the previous FICO model could not capture may receive credit scores. Out of the 37 million, the company also estimates that about 10.7 million will get a credit score of 620 or more–including about 4 million “minority borrowers.”
Therefore, the new FICO model is expected to help expand access to homeownership for approximately 10 million more Americans, including minority borrowers or underserved communities.
The latest FICO score changes might also leave many consumers with a lower score, which will also influence credit card approvals. That means that new FICO changes will likely create a larger gap between consumers with good and bad credit risks.
Consumers with credit scores of 600 and below who continue missing their payments might experience steeper credit declines than before. On the flip side, consumers with over 680 credit scores will likely show higher credit scores with the new changes than the previous calculations.
Your dream home may be within reach with the new FICO credit score changes! Alongside the new FICO models, FHFA will also require mortgage lenders to get only two credit reports from major national credit bureaus, which include TransUnion, Equifax, and Experian. This is a change from the previous requirement, which expected lenders to obtain credit reports from all three agencies.
According to The Wall Street Journal, the new FICO changes will allow millions of Americans with less robust credit histories to access mortgages due to the more predictive feature of VantageScore’s credit score. In addition, the new model will correct historical imbalances that conform to mortgage approvals. That means there will be more opportunities for new homebuyers to enter the market by broadening the scope of eligible borrowers.
If you’re looking to apply for a new mortgage, get informed about the FICO changes (and other changes that apply) before trying to prequalify for a loan. It’s also important to know where your credit score stands and how the changes will affect your score.
The New FICO Credit Score Rule Change
FICO is an abbreviation of the Fair Isaac Corporation, a pioneer in developing a way to calculate credit scores based on the information gathered by credit reporting bureaus.
For the first time in nearly 20 years, the FHFA has introduced new FICO credit score changes, meaning that mortgage lenders will also need to adapt and possibly change the way they approve applications. The FHFA announced a new requirement for mortgage lenders to validate and approve both the VantageScore 4.0 credit score and the FICO 10T credit score models for use in Freddie Mac and Fannie Mae enterprises.
According to FHFA’s Director Sandra L. Thompson, the new decision is set to benefit enterprises and borrowers, as well as maintain safety and soundness. FHFA expects lenders to include credit scores from VantageScore to evaluate their potential borrowers. The new models allow improved accuracy and create a more inclusive approach to evaluating borrowers.
Who Will the FICO Changes Affect? The Impact of the New FICO Changes
People With Less History of Traditional Borrowing (Minority Borrowers)
The previous FICO model didn’t capture factors like utility payments and on-time rents, which the previous manual underwriting process included. The exclusion of such factors affected households with less history of borrowing, particularly the black community.
With the previous model, lenders relied on credit scores and credit history to determine the eligibility of mortgages and loan pricing, which meant that people with no history of traditional borrowing were disproportionately affected.
But with the new FICO changes, VantageScore estimates that about 37 million people that the previous FICO model could not capture may receive credit scores. Out of the 37 million, the company also estimates that about 10.7 million will get a credit score of 620 or more–including about 4 million “minority borrowers.”
Therefore, the new FICO model is expected to help expand access to homeownership for approximately 10 million more Americans, including minority borrowers or underserved communities.
Lenders and Their Consumers’ Credit Scores
The latest FICO score changes might also leave many consumers with a lower score, which will also influence credit card approvals. That means that new FICO changes will likely create a larger gap between consumers with good and bad credit risks.
Consumers with credit scores of 600 and below who continue missing their payments might experience steeper credit declines than before. On the flip side, consumers with over 680 credit scores will likely show higher credit scores with the new changes than the previous calculations.
New FICO Changes Could Open the Housing Market for More Potential Homebuyers
Your dream home may be within reach with the new FICO credit score changes! Alongside the new FICO models, FHFA will also require mortgage lenders to get only two credit reports from major national credit bureaus, which include TransUnion, Equifax, and Experian. This is a change from the previous requirement, which expected lenders to obtain credit reports from all three agencies.
According to The Wall Street Journal, the new FICO changes will allow millions of Americans with less robust credit histories to access mortgages due to the more predictive feature of VantageScore’s credit score. In addition, the new model will correct historical imbalances that conform to mortgage approvals. That means there will be more opportunities for new homebuyers to enter the market by broadening the scope of eligible borrowers.
If you’re looking to apply for a new mortgage, get informed about the FICO changes (and other changes that apply) before trying to prequalify for a loan. It’s also important to know where your credit score stands and how the changes will affect your score.
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