FHFA Approves New Credit Scoring Models

Government-related investors are expected to replace FICO's "classic" score with a more flexible credit reporting method. The Federal Housing Finance Agency previously announced incorporating alternative data in scores to provide more flexible reporting.

Mortgages have largely relied on a system in which the GSEs have used one score and a tri-merge credit report (FICO). This move will mean that mortgage originators can use alternative sources of information, such as those provided by VantageScore or good rental payment history, when determining home financing qualification.

Many applaud this change as it could benefit people working to reestablish credit and younger people who lack substantial payment track records.

However, the switch could require investment in the operational change needed to accommodate it --a cost mortgage companies often pass along to borrowers.

However, most are optimistic as low- and middle-income communities stand to benefit the most. With alternative sources of credit reporting, those with low or no credit scores will have an opportunity to qualify for a lower rate, the same as those with high FICO scores.

"FHFA's action will enable millions more creditworthy Americans to have access to mortgages...," comments Silvio Tavares, president and CEO of VantageScore.

Using an updated score could result in improved loan performance or expanded origination potential. It also gives consumers more choices while giving lenders another tool to better assess risk, both of which can lower the overall costs of loan origination.