The new models, which include rent payment assessment, enable more Americans to access mortgage loans.
The Federal Housing Administration (FHA) has joined with Fannie Mae and Freddie Mac to implement new mortgage credit scoring models, aimed at making homebuying more affordable for Americans, the Department of Housing and Urban Development (HUD) said in an April 22 statement.
FHA will now allow the use of VantageScore 4.0 and FICO 10T as eligible credit scoring models for underwriting FHA-insured mortgages. Both Fannie Mae and Freddie Mac are open to immediately accepting Vantage-scored loans from approved lenders, HUD said.
“This historic move is intended to lower costs for the American people after years of rising prices under the status quo credit score system,” the department said.
Currently, Fannie and Freddie use the Classic FICO model for credit scoring individuals. A FICO score measures the creditworthiness of a person by taking into consideration the individual’s payment history, length of credit history, utilization of credit, and other factors. FICO scores are used by the top 90 U.S. lenders for credit assessment.
The new credit scoring models take into account a wider range of a person’s transaction history, such as rent payments, to assess the credit risk more accurately. This could enable individuals who would not have qualified under the old scoring model to access mortgage loans.
“If you pay your rent and utilities on time, your credit score should reflect it. FHA is moving forward with two modern credit scores that give homebuyers credit for paying their rent and utilities—increasing accuracy for lenders and opportunity for first-time buyers,” HUD Secretary Scott Turner said in an April 22 post on X.
However, including rental and utility data points in the mortgage credit report may pose certain downsides to consumers, according to the National Consumer Law Center.
Millions of tenants who missed their rent payments can have negative information on their credit reports, making it difficult for them to secure rental properties in the future, according to a 2022 report from the National Consumer Law Center.
Even recording only positive rental payments also comes with risks, the report said. If in some months, these rents are not recorded in credit reports, or lower rental amounts than usual are shown, a landlord assessing a prospective tenant may view such information as proof of the person having failed to pay rent for that month, it said.
The organization cited a 2021 report from the Government Accountability Office, which said that even though including alternate data, such as rental payments, could improve credit scores of certain individuals, it was unclear whether this would be “sufficient to qualify many additional consumers for lower-cost mortgages.”
