If you’re a loan officer or mortgage professional, big changes are coming to the industry. No, we’re not talking about the roller coaster ride of rates shooting to 7% and the subsequent slowdown in the housing market, because this change mortgage industry is going to be changing the credit scores they use to qualify buyers and borrowers soon.

Last week, the Federal Housing Finance Agency (FHFA) announced the “validation of FICO 10T and VantageScore 4.0 for use by Fannie Mae and Freddie Mac.”

“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.”

Using these new versions of credit score stalwarts FICO and VantageScore will bring certain benefits and advantages to both borrowers and mortgage professionals. According to the FHFA press release, these “newly approved models will improve accuracy, strengthening access to credit, and enhance safety and soundness.”

More about those benefits:

Improved accuracy of credit scoring

Evaluating credit scores will be more accurate and adhere to higher standards. New standards will “treat borrowers fairly and to protect the safety and soundness of the mortgage market.”

Better inclusion of credit scores

Both FICO and Vantage are focused on “expanding equitable access to credit,” and this adoption of these two new scoring models in the mortgage industry should open the door for more access to homeownership and lending.

Increased safety and soundness

Both FICO10 and VantageScore 4.0 are being heralded as more accurate than Classic Fico, providing “improved view of risk from two different credit score models.” According to the press release, this will lead to better outcomes for all parties involved.

Two, not three, credit reports

Additionally, in their October 24, 2022, press release, the FHFA stated that Enterprises will only need two credit reports form the national credit reporting agencies, not three as previously. This change is expected to reduce costs and promote innovation, but still maintain high standards of gauging borrower risk.

Timing of the switch

It’s important to note the timing of this adoption of FICO10 and VantageScore 4.0. According to the FHFA release, it will be a “multiyear effort” to integrate these new credit scoring models across the industry.

What does this all mean for consumers?

According to Jeff Sipes of Blue Water Credit, there are both pros and cons with switching to a new score.

“The biggest difference is the newer credit scores will look at trended data – 24 months of credit card and debt balances instead of the last 30 days,” says Sipes. “The Vantage credit score is what Credit Karma uses, so the free credit scores they provide there will be more accurate after they make the switch.”

For more information or how this will impact both consumers and professionals in the mortgage industry, please contact Jeff Sipes of Blue Water Credit with your questions.