An estimated 10.7 million more people could qualify for mortgages thanks to upcoming changes to lenders’ credit scoring models. Black households in particular stand to benefit.
On Monday, the Federal Housing Finance Agency (FHFA) announcement that will be needed mortgage lenders to incorporate credit scores of VantageScore when evaluating potential borrowers. Lenders will also have to switch to a new version of the FICO score for the first time in nearly two decades.
Importantly, the VantageScore and new FICO score will include information about a borrower’s rent, utility, and phone payments.
“Requiring both credit scores, when available, will result in more borrowers being able to assess,” FHFA Director Sandra Thompson said in Remarks at the Mortgage Bankers Association Annual Convention on Monday.
Both scores, she said, should help lenders manage risk “while responsibly and sustainably expanding access to credit for borrowers with weaker credit histories.”
The FHFA sets the guidelines for loans that can be purchased by Fannie Mae and Freddie Mac — government-sponsored companies that support the mortgage market by purchasing loans from lenders. Requirements include a maximum loan size (currently $647,200 in most of the country) and a minimum borrower credit score (620).
Often, lenders won’t make loans that don’t meet these terms because they can’t sell them, which increases their risk and cost. The FHFA hopes the changes it announced will allow more people to qualify. However, the FHFA did not set a deadline for implementing the new policies, describing it as a “multi-year effort.”
Who benefits from the FHFA credit score change?
The FICO score became a key part of the mortgage underwriting process in the 1990s. It brought efficiency and cost savings and also proved to be a better predictor of on-time payments than others. current measurements.
However, FICO and other credit scores haven’t captured things like on-time rent or utility payments that were previously included in a manual underwriting process. This omission has disproportionately affected black households, which tend to have less of a traditional borrowing history.
“Lenders rely on credit history and credit scores to determine mortgage eligibility and loan pricing, but black households have consistently faced greater challenges accessing the same services that enabled white households to build strong credit profiles,” notes a recent Urban Institute. report on the potential impacts of using alternative data in mortgage underwriting.
FICO itself estimates that 53 million people do not have enough credit history to be scored by the model currently used by mortgage lenders. Additionally, black households are disproportionately likely to have no FICO score or to have a score below 620.
However, VantageScore estimates that it can provide credit scores to 37 million people that FICO does not currently capture. Of these, the company estimates that 10.7 million will have a score of 620 or higher, including around 4 million “minority borrowers”.
“This action today will allow millions more Americans to access mortgages because of VantageScore’s more predictive credit score…and it will correct some historical imbalances we’ve had for conforming mortgages” , said VantageScore CEO Silvio Tavares, according to The Wall Street Journal.