New lending rule will help low-credit and no-credit home buyers

October 31, 2022 - 3 min read

A new measure of credit

The traditional FICO credit score that Fannie Mae and Freddie Mac rely on to approve home buyers will soon be a thing of the past.

After about eight years of working toward a better solution, the Federal Housing Finance Agency (FHFA) announced a new model that will make it possible for a wider range of borrowers to qualify for home loans.

While it could take a few years to implement among lenders, the dual-score model is designed to expand credit access and make it easier for home buyers with “non-traditional credit” to get mortgage-qualified.

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Giving credit where it’s due

The government-sponsored enterprises Fannie Mae and Freddie Mac are the safety net of the mortgage industry and guarantee the majority of U.S. home loans. For the last 20 years, they used the classic FICO score to help judge the creditworthiness of loan applicants.

However, traditional FICO had some blind spots and didn’t include the entire picture of a person’s financial profile. Plenty of would-be home buyers have been denied in the past, simply because they didn’t have the right type of credit history to qualify under FICO’s model.

“FHFA’s targeted adjustments... are well-timed and will improve access to credit for low- and moderate-income households, first-time buyers, and minority buyers.”

–Bob Broeksmit, president and CEO of the Mortgage Bankers Association

The new credit score model — which will use both FICO 10T and VantageScore 4.0 — will account for previously uncaptured payment histories like rent, utilities and telecommunication bills.

The change is seen as a win-win for borrowers and lenders, expected to keep mortgages safe, reduce costs and open homeownership potential to more people, according to FHFA Director Sandra Thompson.

“While implementing the newer credit score models is a significant change that will take time and require close coordination across the industry, the models bring improved accuracy and a more inclusive approach to evaluating borrowers,” Thompson said.

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What this means for you, the home buyer

This should be a positive change for home buyers and open up credit access to a wider range of people, especially renters.

The change in credit scoring will be more equitable, accurate and inclusive for borrowers. Those who’ve typically been overlooked in the past because they had “thin” credit files will get fairer judgment when it’s time for them to get a mortgage.

“Given the ongoing affordability challenges facing homebuyers, FHFA’s targeted adjustments to the GSEs’ pricing framework are well-timed and will improve access to credit for low- and moderate-income households, first-time buyers, and minority buyers,” said Bob Broeksmit, president and CEO of the Mortgage Bankers Association.

“The announced updates on credit scoring models should help broaden the scope of eligible borrowers and expand access to homeownership for underserved communities,” he continued.

Apply sooner rather than later

This change should lower the barrier to homeownership for many. However, rollout is expected to take a few years.

The good news is, potential home buyers with “iffy” credit don’t have to wait for the new credit score model before applying. Even without it, there are ways to get approved for a home loan with low credit or no credit history at all.

If you’re ready to become a homeowner, reach out to a local lender today to get the ball rolling.

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Paul Centopani
Authored By: Paul Centopani
The Mortgage Reports Editor
Paul Centopani is a writer and editor who started covering the lending and housing markets in 2018. Previous to joining The Mortgage Reports, he was a reporter for National Mortgage News. Paul grew up in Connecticut, graduated from Binghamton University and now lives in Chicago after a decade in New York and the D.C. area.