WHAT CREDIT SCORE COMPETITION MEANS FOR YOUR MORTGAGE LENDING EXPERIENCE
Credit score competition is coming to the mortgage industry but what does this mean for you, your family, and your friends? It means we now have the power and potential to expand sustainable homeownership opportunities to millions of Americans currently disadvantaged by traditional credit scoring models.
How will it affect me?
The model competition will result in more accurate, reliable, inclusive, and updated mortgage credit scores, which means significant benefits for you.
The way consumers use credit has changed, but traditional credit scoring models have not adapted to these shifting behaviors, resulting in millions of Americans being penalized and unjustly denied mortgage loans.
With credit score competition:
- Pricing and interest rates extended by lenders will be more accurate and fair.
- Millions more creditworthy consumers may be eligible for mortgages.
- Millennials and GenZers will be more fairly assessed.
In August 2019, the Federal Housing and Finance Administration (FHFA), Fannie Mae, and Freddie Mac’s regulator issued a new rule authorizing Fannie Mae and Freddie Mac to stop using the current outdated and exclusionary credit score models. (Fannie Mae and Freddie Mac are responsible for facilitating and supporting the majority of U.S. mortgage originations.)
They now are considering using other more inclusive and accurate credit scoring models when assessing credit risk for loan candidates.
VantageScore, which is used for all other loan types, is a potential alternative under consideration to the current required model that’s now in place. Here are a few facts about VantageScore:
- VantageScore was founded in 2006 in the pursuit of creating the most inclusive, predictive, and consistent all-purpose credit scoring model in the United States.
- VantageScore is owned by all three credit reporting companies—Equifax, Experian, and TransUnion—but is independently managed.
- VantageScore is highly accurate and scores 40 million more consumers than conventional models. Therefore, more consumers get access to mainstream credit at fair prices.
Allowing updated models to be used in the mortgage market will help create an environment where companies will keep pushing one another to build more advanced scoring models that take into account the current economy and how people use credit today. The end result: more accurate credit scores that drive sustainable homeownership opportunities and fewer defaults.
Why is it important?
VantageScore and other credit score model developers may now have an opportunity to bring more predictive and inclusive credit scores to the mortgage marketplace.
- Approximately 40 million more consumers can be scored using VantageScore than other traditional credit scoring models; 16 percent of whom are of African- or Hispanic-American descent.
- VantageScore accounts for shifting consumer demographics and behaviors, enabling it to score more than 10 million borrowers with a credit score above 620 (often the minimum credit score required for mortgages) that aren’t even visible to the current models used for mortgages.
- 21% of Millennials have “thin files,” meaning they have less than 3 active credit accounts; something that traditional models penalize. So Millennials are not necessarily less creditworthy but less inclined to use credit, a behavior that is unfairly punished by traditional models.
The potential is huge – more homeowners (including first-time home buyers) and more accurate credit scores! It’s a win-win-win for consumers, lenders, and the economy.