Mortgages

How a New Credit Score for Mortgages Could Help You Buy a House

There's a push to change which credit scores are used to qualify for government-backed mortgages. It’s a move some experts see as long overdue and one that—if successful—might make it easier for you to get a home loan or, at least, receive a better rate.

The Federal Housing Finance Agency (FHFA) is considering switching from a two-decade-old FICO score to one or both of two newer scores, known as FICO Score 9 or VantageScore 3.0, for mortgages backed by Fannie Mae and Freddie Mac. The newer scores are more forgiving of unpaid medical debt and accounts that went into collections but were eventually paid off. They also consider rental payments, if available, which could add years of responsible payment history to the credit scores of many consumers.

The upshot? This could boost some people’s credit scores. Estimates vary, but up to 3 million more people could qualify for a conventional mortgage, depending on the credit score used.

“I'm completely baffled as to why it took this long,” says credit expert John Ulzheimer. “The question isn't whether or not the FHFA should open up mortgage underwriting to newer scoring systems, but why in the hell has it taken them so long to, at the very least, consider it?”

Benefits of the new scores

Fannie and Freddie, which buy mortgages from lenders to help stabilize the housing market, require lenders to use the classic FICO 5 score for the approval process on those loans. The score was first developed in 1995, and fails to take into account how consumer behavior, regulatory practices and data collection has changed since.

FICO 9 (released in 2014) and VantageScore 3.0 (released in 2013) treat certain data differently than the old score does. Here’s how the new scores depart from FICO 5, and what those differences may mean for some borrowers.

They both treat older bills more fairly

The older FICO score considers any paid-off collections negatively for the seven years that they remain on your credit report. By contrast, FICO Score 9 and VantageScore 3.0 ignore any collections accounts that have been paid in full by the consumer, even if they still show up on your credit report.

They consider how well you paid your rent

A stellar track record in paying your rent on time, year after year, is arguably a great predictor of how you might handle a monthly mortgage payment, but it isn’t considered by the FICO 5 score. By contrast, FICO Score 9 and VantageScore 3.0 scores use any rental payment data in your credit report to calculate your score.

It’s important to not overstate the inclusion of rent. Only one in 300 renters have rental data on their credit reports, says Joanne Gaskin, senior director of scores and analytics at FICO. “Most landlords are mom and pop,” she says, “and don’t want the responsibility of furnishing that data to the credit bureaus.”

But momentum to include rental payment in credit reports may gain steam if new credit scores are adopted for Fannie and Freddie mortgages. That might increase the pressure on landlords to cooperate by sharing their tenants’ payment histories.

FICO Score 9 discounts your medical debt

When it comes to medical collections, FICO Score 9 treats overdue medical bills less harshly than other unpaid debts. That’s a big deal because unpaid medical bills account for more than half of all overdue debt found on credit reports.

Medical bills are complex—given how long it can take for health insurance to pay claims—and often arise unexpectedly. Some medical providers are quick to send overdue medical bills to a collection agency without giving consumers a chance to pay. All these factors serve to make medical debt a poorer predictor of debt repayment.

But the current FICO scores used by Fannie and Freddie don’t make that distinction, which could hurt some potential borrowers seeking a mortgage.

VantageScore 3.0 offers faster scoring

Both FICO 5 and FICO Score 9 require at least one account to be open for six months before a credit score can be calculated. But VantageScore can calculate a score after an account has been opened for only one month. This means about 30 to 35 million people who otherwise wouldn’t have a FICO score receive a credit score under VantageScore, the company estimates.

But not all of these would qualify for a mortgage, says Jeff Richardson, spokesman for VantageScore. The number is closer to 2 to 3 million who have the income necessary to support a mortgage in their area and a high enough credit score.

“We’re talking about those who have been credit inactive for longer than six months,” he says, noting that many of them had credit accounts before in good standing that they closed more than six months ago. “There are a lot of creditworthy people in that segment that are being locked out of mortgages.”

How you can weigh in

There’s little downside to using the newer scores, since consumers who score well under FICO 5 would also do so with these. But the upside for many borrowers on the edge of qualifying is immense. For example, FICO estimated that during just a five-month period in 2011-2012, an additional 186,000 borrowers could have gotten conventional mortgages if the FICO Score 9 was used instead of the older one.

It’s unclear now if the FHFA will use FICO Score 9, VantageScore 3.0, or a combination of the two, or remain with the status quo. FICO is recommending FHFA to switch to FICO Score 9, while VantageScore 3.0 prefers if lenders could choose which score they’d rather use.

Your voice can help the agency make that decision. The FHFA has requested comments from other parts of the industry, such as mortgage lenders, consumer advocates and investors. ValuePenguin suggests that consumers also weigh in input to urge FHFA to accept these newer scores. You have until March 30 to make your views known. The voices of those who have been denied mortgages because of their FICO 5 score would be especially useful to spurring the agency to action.

Janna Herron

Janna is a Senior Writer at ValuePenguin covering banking, credit cards and credit scores. She has spent more than a decade writing and reporting on personal finance, real estate and business, and has received three journalism awards for her work.