As economic pressures continue to price many prospective buyers out of homeownership, Fannie Mae and Freddie Mac are turning to new credit-scoring models in an effort to widen access to mortgages.
The two agencies—which guarantee most U.S. mortgages—will now accept loans evaluated using the VantageScore 4.0 model, which incorporates data such as rent and utility payments in addition to traditional credit information. The goal is to improve access to mortgages, enhance affordability, and foster a more competitive housing market.
However, the same economic challenges that have hindered homebuying also make accurately assessing creditworthiness imperative to protecting both consumers and lenders. Moving away from a tried-and-true model raises questions about potential risks in the years ahead.
“FICO scores set the gold standard for credit scoring, and their U.S. model has been used in all consumer collateral classes,” said Brian Riley, Director of Credit and Co-Head of Payments at Javelin Strategy & Research. “It has been tested in recessions and recovery environments for more than 40 years.”
“Lenders rely on the FICO score to manage risk from stem to stern,” he said. “These scores are used at the acquisition point, as a credit management tool, a retention tool, and even through capital markets for asset securitizations. It is a steady fact, more than 90% of credit card lenders rely on the FICO Score.”
Expanding Homeownership Access
While the importance of credit scores has not been widely disputed, some lenders have adjusted how they interpret them. For example, Fannie Mae and Freddie Mac have lowered their minimum 620 middle credit score requirement for certain home purchases and refinance loans.
The intent is to expand access to homeownership for borrowers with limited credit histories and to support “near-miss” applicants—those with sufficient income or cash reserves whose credit scores fall just below the 620 threshold.
The Best of Both Worlds
While there is broad agreement that challenges persist in the housing market, easing lending standards also carries risk if not carefully managed. As a result, a blended approach—combining traditional credit scoring with more current data on payments and debt behavior—is increasingly seen as essential.
“FICO Score 10T is an illustration of how FICO keeps its iconic scoring model relevant, as the mortgage industry requires tools that open access to borrowers who may be on the fringe,” Riley said. “The model includes trended data, such as rental payments and utilities, which will help issuers broaden access while keeping the credit score as a highly predictive risk management tool.”
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