On July 8th, FHFA Director Bill Pulte announced that Fannie Mae and Freddie Mac, the Government-Sponsored Enterprises (GSEs), are to commence using the Vantage 4.0 scoring model. He further stated that this change would be implemented “effective immediately.” While encouraging the GSEs to adopt the Vantage 4.0 scores may be beneficial, the abrupt timing of this decision has caused some uncertainty within the mortgage industry. Let’s break it down:
What must happen before Fannie and Freddie can actually start utilizing Vantage Score?
- Both companies will have to adjust their Loan Origination Systems (LOS).
- Both companies will additionally have to adjust their pricing structures.
- Third party Credit Reporting Agencies (CRA), in which brokers use to pull credit, will have to update their systems and obtain the proper codes from the bureaus in order to begin implementation.
The GSE’s are currently working on implementation guidelines and updating the Credit Score Initiative Playbook with a new timeline.
What about non-GSE loans?
- As of now the following will also accept the Vantage 4.0 score:
- The Veterans Administration
- The Federal Home Loan Banks of San Francisco
- The Federal Home Loan Banks of New York
- The Federal Home Loan Banks of Chicago
- The Federal Home Loan Banks of Dallas
What are the major differences between FICO Classic Scores and Vantage 4.0?
While Both FICO and Vantage have score ranges of 300-850 there are some significant differences.
- To generate a score for Vantage 4.0 a consumer only needs one month of credit history.
- To generate a FICO score you need a minimum of six months of history on an account.
- Vantage Score ignores all paid collections (not just medical).
- Non-medical paid collections are factored into FICO scores. Paid medical collections are removed.
- Vantage Score ignores all unpaid medical collections.
- FICO ignores unpaid medical collections under $500.
- Vantage weighs payment history more than FICO- 41% vs FICO’s 35%.
- Vantage weighs credit utilization less than FICO- 20% vs FICO’s 30%.
- Vantage 4.0 factors in rent and utility payments where FICO Classic does not. FICO’s newer model 10T does, however, it is not coming into play at this time and will be looked at in the future.
Does this mean all Landlords will report to the bureaus now?
No, it unfortunately does not work that way. To report to the bureaus, contracts must be signed, reporting software must be obtained and minimums of what is reported every month must be met. For the majority of landlords with only a few rentals or only a few complexes, meeting the minimum reporting requirements is not usually possible.
To have rent reported the tenant (and sometimes the landlord as well) will have to enroll in a rent reporting service. There are, fortunately, several available. Rent Reporters, Self, Kharma and Boom to name a few. It is important to note that some companies may charge a fee to the tenant or the landlord or both to utilize their services. Some also do not report to all three bureaus.
What about utilities?
Linking utilities to a credit report is similar. Self and Simplebills are two companies that consumers can utilize. Trans Union has its own program called eCredable, but this affects only the Trans Union Vantage score. Experian has Experian Boost, which affects FICO 08 and 09. These models, however, are not used for mortgage purposes. It also affects FICO 10T which, again, is on hold for now for use by the GSE’s.
What about the bi-merge credit report that has been discussed in the last few years?
This matter is currently on hold. Once the new directive has been implemented, GSEs will accept either three FICO scores or three Vantage 4.0 scores. The credit report will remain a tri-merge report, and brokers will not be permitted to mix and match Vantage and FICO scores. Only one set of scores will be acceptable for any given loan, and both models cannot be used simultaneously for a single loan.
What is this change taking place?
Given the increasing costs associated with credit reports, this development is expected to foster greater competition within the industry, which may lead to a reduction in overall expenses. It is anticipated that approximately five million consumers with limited or “thin” credit files — those who are often considered “invisible” or underserved due to a lack of credit history or those with significant medical debt — will benefit from this change. This initiative aims to enhance their opportunities to become homeowners, including first-time homebuyers, minority groups, and individuals with lower incomes.
In conclusion, the integration of Vantage 4.0 into the mortgage industry has the potential to significantly benefit millions. Although there are still several details to be finalized, the most important priority at this stage is patience as the GSEs continue to diligently develop the final implementation framework. Once established, the updated Playbook will be available on both the Fannie Mae and Freddie Mac websites.