On November 10, 2020, the Federal Housing Finance Agency (FHFA) announced that it issued a final rule giving Fannie Mae and Freddie Mac the stamp of approval to continue using the Classic FICO credit score model for mortgage-loan underwriting.
So, the lender will look at your Classic FICO score if you’re seeking a conventional, conforming home loan.
Fannie Mae and Freddie Mac are government-sponsored entities—often called “Enterprises”—that own or guarantee many, around half, of the mortgage loans in the United States. But these Enterprises don’t make loans. Mortgage companies, banks, and other lenders sell the loans they originate to investors, like Fannie Mae and Freddie Mac, on what’s called the secondary mortgage market.
If lenders want to sell their loans to Fannie Mae or Freddie Mac, they must meet the Enterprises’ guidelines. Conventional loans that adhere to these guidelines are called “conforming loans.” As part of the process of making conforming loans, lenders look at an applicant’s credit score, which they get from a credit scoring company, like FICO.
Credit scoring companies calculate credit scores using an algorithm or mathematical model. Scores are based on what’s in a person’s credit history from a credit reporting agency, like Equifax, Experian, or TransUnion.
FICO is the dominant credit scoring company when it comes to consumer lending. FICO has many different scoring models. So, a person’s score will likely vary depending on:
FICO also offers industry-specific variations of its scoring models, like for the auto, credit card, and mortgage-lending industries. FICO scores generally range from 300 to 850.
Another type of credit score is VantageScore. Equifax, Experian, and TransUnion introduced VantageScore as a joint venture in 2006 to compete with FICO. VantageScore used to have a different range for scores than FICO, but now it uses the same range—300 to 850.
FICO is the most common score used in the mortgage-lending business. Again, FICO has many different scoring models. Fannie Mae and Freddie Mac have in the past, and will for the near future, require lenders to use the “Classic FICO” credit score to measure credit.
The Classic FICO score is also called these names at the major credit reporting agencies:
As of October 2020, Fannie Mae generally requires borrowers to have a credit score of 620 or 640, depending on how the loan was underwritten. Depending on the circumstances, Freddie Mac requires a score of 620 or 660 for a single-family primary residence. Of course, lenders may also have requirements that are more strict than the Enterprises.
Currently, Fannie Mae and Freddie Mac don’t allow the use of VantageScore in the underwriting process. But in its final rule, the FHFA said it will take an additional year to complete the approval process for third-party credit score models, like VantageScore, that it has been considering allowing lenders to use.
Currently, the FICO website offers access to up to 28 of the most widely used FICO scores, including mortgage-lending (Classic FICO), auto, and credit card versions, and access to a copy of credit scores based on your Equifax, Experian, or TransUnion file. But the downside is that you have to pay for credit monitoring to the tune of $29.95 per month, which will automatically renew unless you cancel, to get them. You may cancel at any time, but partial month refunds aren’t given. Also, FICO might change the terms of this program and the scores offered in the future.
Effective date: November 10, 2020