The Fed approved two new credit rating models for Fannie Mae and Freddie Mac
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 underwrite most mortgages made in the United States
Both agencies are now allowed to use the FICO 10T credit scoring model and the VantageScore 4.0 credit scoring model, instead of relying on the classic FICO scoring model that has been the standard for nearly two decades. The goal is for these two new models to help improve accuracy by considering the full payment history of borrowers and taking into account rent, utility 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 lenders to provide credit reports from the three consumer reporting agencies: TransUnion, Equifax and Experian. Instead, lenders will only have to provide credit reports from two of the three agencies.
Whatis the difference between FICO and VantageScore?
FICO and VantageScore provide consumers with three-digit credit scores based on information in your credit report. Lenders look at this number (along with many other factors) when deciding how likely you are to repay the money you borrow. While many consumers are unaware of the difference between Vantage and FICO, these competing scoring models vary slightly in how they are calculated and the ranges they provide to their customers.
FICO ranks credit scores from poor to exceptional, with scores above 670 considered “good” and scores below 580 considered “bad”. VantageScore credit scores can fall into a few different categories, ranging from subprime (300-600) to superprime (781-850). The higher your score, the better.
Both scoring models consider factors such as payment history, amounts owed, amount of credit you’re using, new credit applications, and credit mix. However, each scoring model assigns slightly different weights to these factors when calculating your overall score.
Maintain a good credit score in both scoring models, you’ll need to adopt positive credit habits, such as making on-time payments, keeping your credit usage below 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 get a mortgage and favorable terms like a low interest rate. Ideally, these new credit score models will help level the playing field for borrowers with thinner credit profiles. The hope is that potential buyers, regardless of income level and race, will have better access to mortgage products.
A report 2021 by the Urban Institute found that black and Hispanic Americans are more likely to have little or no credit and are more likely to rent. This more robust credit scoring model could help create an easier path to homeownership.
“Today’s decision will benefit borrowers and businesses, while maintaining safety and soundness,” said Sandra L. Thompson, FHFA Director. “While implementing the new credit scoring 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 credit scoring. borrowers.”
3 easy ways to check your credit score
There are several ways to 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.
- Use a credit reporting service or site: Platforms like Credit Karma or Credit Sesame are free and can give you regular updates on your score and any major changes to it.
- 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 increase your FICO score since it connects to your bank account and gives you credit to pay your daily bills, like your utilities or your rent, on time.
- 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 non-cardholder consumers.
Different products allow you to check different scores – you won’t see both your VantageScore and your FICO in the same place, so you can search across multiple platforms to make sure you have all the information you need. Your credit score plays a key role in the likelihood of your financing being approved, as well as how much it will cost you to borrow that money. Knowing your credit score and how lenders rate it is essential to helping you achieve all of your major financial goals.