The Fed approved two new credit-scoring models that will improve accuracy within mortgage lending

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Yesterday, the Federal Housing Finance Agency (FHFA) approved two new credit scoring models for use by Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that guarantee most of the mortgages made in the U.S. 

Both agencies are now authorized to use the FICO 10T credit score model and the VantageScore 4.0 credit score model, as opposed to relying on the classic FICO scoring model that’s been the standard for nearly two decades. The goal is that these two new models will help improve accuracy by taking into account borrowers’ full payment histories and factoring in rent payments, utilities, and telecom payments.

In addition to these new scoring models, the FHFA also announced a change in credit reporting requirements for lenders. Currently, Freddie Mac and Fannie Mae require that lenders provide credit reports from all three consumer reporting agencies—TransUnion, Equifax, and Experian. Instead, lenders will only have provide credit reports from just two of the three agencies. 

What‘s the difference between FICO and VantageScore? 

Both FICO and VantageScore provide consumers with a three-digit credit scores based on information in your credit report. Lenders look at this number (along with a lot of other factors) when deciding how likely it is that you’ll repay any money you borrow. While many consumer don’t know the difference between Vantage and FICO, these competing scoring models vary slightly in how they are calculated and the ranges they provide their customers.

FICO categorizes credit scores from poor to exceptional with scores above 670 considered “good” and scores below 580 considered “poor.” VantageScore credit scores can fall within a few different categories, ranging from subprime (300-600) to superprime (781-850). The higher your score, the better.

Both scoring models consider factors like payment history, amounts owed, how much credit you’re using, new credit inquiries, and credit mix. However, each scoring model assigns slightly different weights to these factors when calculating your overall score.

Maintaining a good credit score across both scoring models will require you to practice positive credit habits like making on-time payments, keeping your credit utilization under 30% of your available credit, and being selective about new credit applications.

What does this change mean for homebuyers?  

Your credit score plays a huge role in your ability to secure a mortgage and favorable terms like a low interest rates. Ideally, these new credit scoring models will help even the playing-field for borrowers with thinner credit profiles. The hope is that potential homebuyers, across income levels and races, should have better access to mortgage products. 

A 2021 report by the Urban Institute found that Black and Hispanic Americans are more likely to have no or low credit and are more likely to be renters. This more robust credit-scoring model could help create an easier path to homeownership. 

“Today’s decision will benefit borrowers and the Enterprises, along with maintaining safety and soundness,” said FHFA Director Sandra L. Thompson. “While implementing the newer credit score models is a significant change that will take time and require close coordination across the industry, the models bring improved accuracy and a more inclusive approach to evaluating borrowers.”

3 easy ways to check your credit score 

There are several ways you can check your credit score and you should get into the habit of monitoring it regularly—especially if you have a big purchase on the horizon. 

1. Use a credit scoring service or site: Platforms like Credit Karma or Credit Sesame are free to use and can give you regular updates on your score and any major changes to it. 
2. Request your score from one of the major credit bureaus: Experian, TransUnion, and Equifax all offer consumers access to their credit scores through their credit monitoring products—although some may require you to pay a fee. Experian Boost is a free product that allows you to track your credit score and can help you raise your FICO score since it connects to your bank account and gives you credit for paying everyday bills, like your utilities or rent, on time.
3. Check with your bank or credit card issuer: American Express, Chase, Capital One, and a number of other banks offer free credit scores, even for consumers who are not cardholders.  

Different products allow you to check different scores—you won’t see both your VantageScore and FICO in the same place, so you may want to look on multiple platforms so you make sure you have all the info you need. Your credit score plays a key role in the likelihood that you’ll be approved for financing, as well as what it costs you to borrow that money. Knowing your credit score and how lenders are evaluating it is key in helping you hit all of your major financial goals.