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A new policy change at mortgage giants Fannie Mae and Freddie Mac could help first-time homebuyers qualify for a mortgage if they have a track record of paying their rent on time.
Effective immediately, Fannie and Freddie will allow mortgage lenders to use VantageScore credit ratings to assess borrower creditworthiness, in addition to or instead of traditional FICO scores, Federal Housing Finance Agency Director Bill Pulte said on Tuesday.
Unlike FICO, VantageScore takes rent payment history into account, if those payments are reported to either Equifax, Experian, or TransUnion, the three major credit bureaus.
“We are expanding credit access to millions of forgotten Americans—people who live in rural areas, renters who pay their rent on time every month—and bringing down closing costs,” said Pulte, who is also the chairman of Fannie and Freddie, in a social media post.
FICO and VantageScore both issue a credit score between 300 and 850 to potential borrowers, with the goal of projecting the likelihood that a person will fall behind on debt payments.
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A higher score means you’re less likely to miss a payment, and the highest scores can help you qualify for a lower mortgage rate.
However, the two companies have different methods for calculating scores. Unlike FICO, VantageScore can take rent payments into account and can generate a credit profile with just one month of credit history, as opposed to six for FICO.
“This should help folks with thinner credit files get qualified for mortgages, which will add to the pool of potential homebuyers and boost the market as a whole,” says Realtor.com® senior economist Joel Berner. “People who haven’t taken out much debt on things like auto loans or credit cards will have the opportunity for their rental history to help them qualify for a loan.”
VantageScore is also typically easier for consumers to check for free through credit monitoring services.
The addition of VantageScore as an option for mortgage lenders could also help improve competition in the credit score business, potentially lowering fees and reducing closing costs for consumers.
Last year, the Consumer Financial Protection Bureau announced a public inquiry into “junk fees” that increase mortgage closing costs, including credit-check fees that have soared in recent years.
“The market for credit scores has long been dominated by one company’s algorithm: the Fair Isaac Corporation, which sells the FICO score,” former CFPB Chairman Rohit Chopra said in a speech last year. “Mortgage lenders have shared that costs for credit reports and scores have increased, sometimes by 400% since 2022.”
Pulte in a social media post on Tuesday predicted that lenders who used both FICO and VantageScore “should get better pricing,” arguing that “it’s just math.”
Although Fannie and Freddie do not originate loans themselves, the two government-backed entities are powerful forces in the world of mortgages as major buyers of whole loans for repackaging into securities.
Home loans that meet the rules and requirements set out by Fannie and Freddie are known as “conforming” mortgages, which are the type of loans offered by nearly all lenders and the most common mortgage vehicle for homebuyers.