Mortgage lenders adopt alternative credit scoring models

Mortgage lenders are expanding the use of alternative credit scoring models, moving beyond the traditional FICO score that has long dominated the industry. Government-sponsored enterprises Fannie Mae and Freddie Mac have approved the use of VantageScore 4.0, which incorporates data points such as rental payment history to evaluate creditworthiness.

United Wholesale Mortgage (UWM) reports that approximately 25% of its borrowers are seeing more advantageous credit results using the new model, a figure expected to rise to 40% by the end of the month. These improvements can lead to better loan eligibility, lower mortgage insurance costs, and the conversion of previously declined applications into approvals without changing underlying lending standards.

While adoption has been concentrated among major lenders like UWM and Rocket Mortgage, the Federal Housing Administration has announced plans to insure mortgages underwritten with both VantageScore 4.0 and the upcoming FICO 10T starting January 1. Regulators are also considering reducing the number of required credit reports from three to two to further streamline the process.