Until recently, lenders that sell mortgages to Fannie Mae and Freddie Mac, the government-sponsored enterprises that guarantee about half of U.S. mortgage debt, could review credit scores only from FICO to help determine whether an applicant qualifies for a loan. But now those lenders also have the option of using VantageScore, a competing score owned by the three major credit-reporting companies (Equifax, Experian and TransUnion).
FICO and VantageScore evaluate many of the same criteria to create scores, including an applicant’s record of on-time loan and credit card payments, but their formulas differ.
The version of VantageScore that mortgage lenders may now review, known as VantageScore 4.0, also factors in such alternative data as an applicant’s history of rent payments.
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FICO’s newer models, including FICO 10T, integrate more of this nontraditional data, too. (Currently, however, many landlords don’t provide rental-payment info to the credit-reporting companies). Mortgage lenders that extend loans backed by Freddie and Fannie are using older FICO models now, but they will later be able to adopt FICO 10T.
Credit scores that include alternative data could present a more complete picture of an applicant’s credit history and expand the pool of those who get loan approvals, says Keith Gumbinger, vice president of mortgage information website HSH.com.
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Regardless of which credit score a mortgage lender uses, you can boost your odds of being approved for a loan and capturing a desirable interest rate by following the basic rules to raise your score.
Make all your bill payments on time, and keep the balances on your credit cards low as a percentage of their limits. That’s especially important if you’re getting ready to apply for a mortgage; aim for a credit-utilization ratio in the single digits.
Get your free credit reports from annualcreditreport.com and correct any errors you find that could hurt your score.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
