What FICO’s New Credit Scores Mean for the Mortgage Industry

You may have heard the news; Fair Isaac is updating FICO scores! That’s right, two new credit scores are expected this summer — FICO 10 and FICO 10T.

Don’t panic, these new scores won’t have much of an impact on the $2 trillion of mortgage originations expected this year. This is because lenders follow a classic FICO model as required by Fannie Mae and Freddie Mac. That’s not going to change without approval from the Federal Housing Finance Agency, something which can take years.

And where do lenders obtain these scores? They come from the three credit bureaus – Equifax, Experian and TransUnion. Not only do they all use versions of FICO, they also have their own model called the VantageScore®, developed by the bureaus to bring more consistency to their scoring. While it’s up to banks and lenders to decide which model they’ll use, 90 percent of mortgages are backed by Fannie and Freddie so many opt for the older FICO versions in such cases.

Lenders are directed by Fannie and Freddie to use the middle of the three bureau scores for underwriting. If only two credit bureau scores are available, the lower score is selected for the process. Credit score, including the current debt-to-income ratio and credit problems are also considered.

In the end, FICO 10 will impact private-label mortgages and that’s only about 10% of originations.

Mortgage FICO Scores vs. Personal Scores
To make matters a little more head spinning, a mortgage FICO score differs from other scores. Wait, you didn’t think each consumer had only three scores — one from each bureau — did you? Oh no, no! There are six types of FICO scores: General, Auto, Mortgage, Credit Card, Installment loan and Personal Finance. They all use different variations in their scoring models — of course! They may also vary per bureau. A personal score can often be as much as 100 points higher than a mortgage score. This is because they are based on different criteria.

Why release new FICO scores?
Updated scoring models ensure FICO is capturing the most current information and attributes for creating predictive scores. After all, buying habits change and newer data helps identify those trends. FICO 10 will score consumers more strictly on issues like late payments and rising debt levels. It will weigh personal loans more heavily. This will penalize borrowers like those who consolidate debt with personal loans then rack up more debt afterwards.

The FICO 10T model will incorporate a borrower’s trended data for 24-months to map their credit behavior. While this change could cause a score drop for borrowers who have amassed more debt during that time, it will reward those who have been paying down their debts.

Boosting Your FICO Scores
In the end, it’s best not to get into the weeds when it comes to the array of FICO scores and their implications. While the new scoring model is unlikely to change much of the mortgage world, FICO 10 will start incorporating consumer debt levels into their scoring model. So, consumers should focus on actions that boost scores; paying bills on time, avoid running up revolving debt, not closing accounts and opening new ones only when necessary.

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