A sizable shockwave could be about to upend the credit scoring world. If it happens, the change could very well confuse borrowers and create headaches for originators. A Federal Housing Finance Agency (FHFA) October 2022 communique mandated the gradual implementation of new credit report and scoring model changes
Set originally for implementation by fourth quarter 2025 (which has now been extended) for each loan sold to Fannie Mae, Freddie Mac and Federal Housing Finance Agency (FHFA) lenders will be required to pull two credit reports and submit two different credit scores for each of two credit bureaus, making it a total of four scores. Currently, only one score is submitted with each of three credit bureaus. Freddie Mac announced in January that the change would be moved to a to-be-determined date.
The changes will require each credit bureau to have two scores, FICO 10T and VantageScore 4.0 credit scores. So, in the future two credit scores from two credit bureaus will be used to determine a homebuyer’s credit score.
These changes also add layers of complexity to the mortgage approval process and confusion for borrowers, particularly with the dual scoring requirement and the shift from using three to two credit reports. The updates are intended to offer fair assessments of borrower creditworthiness, bringing significant impacts for originators and borrowers alike.
Trended data
The introduction of FICO 10T and VantageScore 4.0 modernizes credit scoring, incorporating trended data — a more detailed view of borrowers’ financial behaviors over a 24-month period. Instead of merely looking at static snapshots, these models examine patterns such as how borrowers manage revolving accounts like credit cards over time. This trended data can reflect more accurately the financial habits of borrowers, making it harder to manipulate scores by temporarily paying down debts.
“For borrowers, this could lead to confusion as they see two different scores for the same credit bureaus. And it’s possible the scores will be off by 100 points.”
A crucial advancement is the use of tools such as Experian Boost, which allows the addition of alternative trade lines, such as rent, utility and phone bill payments, directly into a borrower’s credit report. Previously, originators could add this data as supplements, but it didn’t affect the borrower’s credit score. Now, these trade lines can actually increase a borrower’s score, benefiting those with limited traditional credit histories and making mortgages more accessible.
In addition to Experian Boost, there are other services that allow reporting of alternative trade lines to multiple bureaus. These tools enable clients to boost their credit scores by including consistent payments that might otherwise be overlooked, expanding the pool of mortgage-eligible borrowers.
Moreover, the FHFA has reduced the number of credit reports required from three to two credit reports. This means that instead of obtaining reports from all three major bureaus — Equifax, Experian, and TransUnion — only two will be used. This reduces the variability and discrepancies that often arise from slight differences between the bureaus, streamlining the approval process and making credit evaluations more consistent across lenders.
Multiple scores
One of the most significant sources of added complexity comes from the FHFA’s mandate that lenders deliver both FICO 10T and VantageScore 4.0 scores when available. This means that for each of the two credit bureaus, originators will need to evaluate two separate credit scores — one from FICO and one from VantageScore.
As a result, a two-bureau report could contain up to four different credit scores (two from each bureau: one FICO score and one VantageScore for each).This dual-model requirement adds complexity for both originators and borrowers. Originators will need to interpret multiple scores to assess a borrower’s creditworthiness accurately. Each score model will behave differently and it is not clear yet how exactly.
For borrowers, this could lead to confusion as they see two different scores for the same credit bureaus. And it’s possible the scores will be off by 100 points, although no one knows how frequently this would be the case. Originators will need to manage borrower expectations, explaining why their scores differ between FICO and VantageScore and how each score influences their mortgage approval. This added layer of complexity may slow down the mortgage process initially as originators adjust to the nuances of the new system.
Complete picture
The use of trended data in both FICO 10T and VantageScore 4.0 provides a more comprehensive view of a borrower’s financial habits. Instead of simply looking at static snapshots, the models assess how borrowers manage credit over time, leading to more accurate credit evaluations.
“For mortgage originators, these changes will affect how they approach both prime and subprime borrowers.”
For example, a borrower who consistently carries high balances but pays them down just before applying for a loan will no longer see as large a score boost, making the process fairer for borrowers who manage credit responsibly over the long term. Additionally, alternative trade line reporting through Experian Boost and similar tools allows people to improve their credit scores by including non-traditional payment histories, such as rent or utilities. This can be especially beneficial for younger borrowers or those who have not built a robust traditional credit history.
The shift to using two credit reports instead of three simplifies the mortgage approval process, reducing discrepancies and improving consistency between reports. For originators, this change means fewer potential sources of confusion when evaluating a borrower’s credit- worthiness.
With the introduction of trended data, credit rescoring on revolving balances will not factor in as much as it did before. Borrowers with excellent credit histories will not be as harshly penalized for minor delinquencies, such as a single late payment, which under previous models could cause such a significant score drop that the borrower needed credit repair. The new models consider the overall credit behavior, reducing the disproportionate impact of minor credit events.
Potential downsides
The most significant downside of the new models is the complexity introduced by having two separate scores per bureau. With both FICO 10T and VantageScore 4.0 required for each credit report, originators will need to navigate potentially four different scores from two bureaus. Understanding and explaining the differences between these models will require additional training and careful communication with borrowers, adding time and effort to the mortgage process.
Subprime borrowers, who often carry high balances, may find it more difficult to achieve a significant score increase by paying down their credit card balances. Since FICO 10T evaluates a borrower’s credit behavior over a two-year period, a quick debt payoff right before applying for a mortgage will no longer yield as substantial a score boost as it did under older models.
So, these borrowers will more likely need to repair their credit for a score increase by removing negative accounts. The longer-term option would be to keep their balances low for several months after payoff to see incremental score increases over months to come.
The new models require originators to familiarize themselves with trended data, alternative trade lines, and the nuances of evaluating both FICO 10T and VantageScore 4.0 scores. This learning curve may initially slow down the mortgage approval process as originators adjust to the new system and educate clients on how these changes affect their eligibility. In addition, borrowers will find it more difficult to understand the requirements, given there are two scores being used per bureau and each score will behave differently.
Varying strategies
For mortgage originators, these changes will affect how they approach both prime and subprime borrowers. Subprime borrowers, who frequently carry high balances, may no longer see significant credit score improvements from short-term debt payoffs. Mortgage originators may need to focus more on long-term credit strategies to help these clients qualify for loans.
Conversely, A-paper borrowers — those with excellent credit who maintain low balances — will likely benefit from the new models. The introduction of trended data in FICO 10T rewards responsible credit management over time, leading to better mortgage terms and faster approvals for these clients.
The FHFA’s planned adoption of FICO 10T and VantageScore 4.0 brings significant changes to the mortgage lending landscape. While these models improve fairness and inclusivity by using trended data and allowing alternative trade lines, the addition of multiple credit scores per bureau introduces more complexity for originators and borrowers. The shift to two credit reports simplifies the process. Originators, however, may find it more unpredictable to change scores and much more difficult to explain the scoring process to borrowers.
