Consumers who are preparing for a major purchase, such as a home, should make sure their credit and finances are in order before shopping around for the best mortgage rates. This will help insure they are getting the best pricing on the loan.
To get an accurate idea of your mortgage credit score, you should be checking through a score source that offers the same or similar mortgage scores as the lender will use. Many of the “free” credit scores that you can find online are not the same model as scores used by lenders to determine risk. You should be checking your FICO scores – but keep in mind this could change in the future.
FICO Vs. Vantage
The FICO score has remained the most widely used credit score for decades. FICO has had a monopoly on credit scoring, in fact only in the last decade has there even been a competitor. In 2006, Vantage Score Solutions was created by the three major consumer credit bureaus.
Currently, the Federal Housing Finance Agency (FHFA) requires that lenders use the FICO Mortgage Score when issuing mortgages backed by Fannie Mae or Freddie Mac.
But the procedure for credit qualification on mortgages as we know it, might change. With the spotlight on the credit reporting industry due to many circumstances including the major Equifax Breach, the Federal Housing Finance Agency (FHFA) may want to shake things up a bit – looking into other or additional models to evaluate borrower risk.
The FHFA issued a press release back in January 2018 asking for feedback on credit score requirements. It stated that they are currently evaluating three different models, the Classic FICO, FICO 9, and Vantage Score 3.0, and are looking for public feedback.
Here are the options they are looking at:
Option 1: A single-score system. This would require the use of either FICO 9 or VantgageScore 3.0.
Option 2: This would require the use of both the FICO 9 and VantageScore 3.0.
Option 3: This would allow lenders to choose which model to use within certain restrictions. They would need to pick FICO 9 or VantageScore 3.0 (or possibly both) and use that model for a predetermined period.
Option 4: Lastly, a waterfall approach. This would establish a primary and secondary credit score. For instance, if a borrower does not have much credit under the first source the lender would then be able to turn to the secondary source.
The latter two options would require adaptation to new policies to manage the use of more than one model. The public Request for Input will be available until March 30, 2018.
A Squabble Over FICO Vs Vantage
There are some people, banks and lenders included, who believe that FICO has an unfair monopoly over the mortgage market and that other scoring models should have the freedom and ability to compete. They believe that by expanding the number and type of approved scoring models that can be used, more borrowers will be able to qualify. For instance, Vantage claims in a January blog that they “…will assign credit scores to consumers if they have a credit card or a loan for as little as one month. FICO requires six months.” In theory giving the “unscoreable” borrowers more leeway to qualify for a mortgage.
On the other hand, FICO mentions in a February blog that their score variations leave more room for accuracy in evaluating risk. Each version has a different score because it uses a different algorithm and weighs different factors more heavily. But, they still maintain that free credit scores and Vantage Scores just lead to more confusion among consumers, and the quick scoring turnaround with Vantage should be a concerning sign of inaccuracy.
What Does This Mean for Consumers?
For now risk evaluation will remain as we know it, consumers should still be monitoring the “right” credit scores before looking for a mortgage. When the FHFA makes a final decision and a deadline to implement any changes is when consumers should start evaluating other scores. This has the possibility to make borrowing easier or more confusing for consumers. No matter what model they end up using, negative information will still damage your chances of qualifying for a mortgage so make sure you’re keeping up your end of the bargain and speak with a credit expert if you have any questions on the reports.
*Update* The FHFA will not be initiating any changes until at least 2019, the launch date will wait until after the launch of a new Single Security Initiative, which is scheduled for 6/3/2019. There has not been any announcement yet since the request for public feedback closed on March 30, 2018.