Credit Score Shake-Up Could Help Millions Buy a Home—but Lenders Say There’s a Hidden Risk

The Federal Housing Administration's push to modernize credit scores could change the system, but also brings new risk, analysts say.

Financial firms studying the FHA's shift to encourage Fannie Mae and Freddie Mac to adopt VantageScore 4.0 expect consequences on the system. With VantageScore 4.0, as well as FICO 10-T, banks can incorporate rental and utility payment history when considering whether to approve someone for a mortgage.

In September, FHA Director Bill Pulte said on X that FHA would combine and use the same pricing grid for both VantageScore and FICO. That came after feedback from lenders and consumers, he said.

But those changes could insert more risks into the financial system, several analysts told the Wall Street Journal. That's because VantageScore and FICO use different metrics in scoring. If they're used interchangably, consumers could favor their VantageScore, which tends to be higher.

Pulte has cast the move as updating how credit scoring works to incorporate modern financial habits. VantageScore believes its scoring might make it easier for 7.7 million Americans to qualify for a mortgage. Many of these people have thinner traditional credit files.

"We do not care who wins—we just want them and Vantage to compete—not be a cartel or abusive monopolies," Pulte said in a Sept. 30 post on X.

Changing the mortgage game

In April, it was announced that government-run mortgage giants Fannie Mae and Freddie Mac said they would accept mortgages underwritten with a credit score model that takes on-time rental payments into account. The National Association of Realtors® and the Mortgage Bankers Association applauded the move as a modernization of credit reporting.

And a number of institutions have followed. For example on Tuesday, the Federal Home Loan Bank of Boston announced its 400 member banks could pledge mortgage collateral using VantageScore 4.0 credit scores, effective immediately. It's the seventh Federal Home Loan Bank to do so, affecting 1.5 million customers.

Milliman, a firm that provides consulting, data analytics, and technology solutions across several primary sectors, studied 46 million loans from 2013 to 2023. Vantage scores tend to be slightly higher—by annual average, this can be a difference of just 1 to 3 points. On the lower end of credit reports, Vantage had a higher default rate, though Milliman determined both are strong credit-scoring models.

Still, the divergence is significant enough to cause pricing differences for about half of the borrowers in the data, Milliman found.

"FICO 10-T and VantageScore are two different models and cannot be used interchangeably; both scores require separate approval thresholds and pricing calibration," Milliman said in the report.

Borrowers take heed

Realtor.com® senior economist Joel Berner says VantageScore requires a shorter credit history and also includes rent and utility payments, so many prospective buyers who don't yet have a solid FICO score can benefit from this alternative.

"My take is that expanding credit access to more potential homebuyers is a benefit to a housing market that is struggling for sales volume. Those with thinner credit files, who the VantageScore favors, deserve the chance to be homeowners," Berner says.

"However, being forced by the administration to treat the score the exact same as a FICO score seems like it introduces risk, as those less creditworthy buyers can get the same terms as those with comparable scores in the FICO system, which requires more credit history.

"Introducing more risk means borrowers paying more to account for it, adding cost frictions that could prevent transactions from happening."

If the lender uses both, find out whether they pick the highest one, Berner advises. And make sure they're using VantageScore 4.0—the only model that counts.

Some lenders have been hesitant to adopt the same idea of using both scoring models. Lenders have relied on FICO for a long time and believe it is more conservative.

"There are greater risks with it,” Melissa Cohn, regional vice president of William Raveis Mortgage, said in an email.

"Many lenders are skeptical about the difference between the FICO scoring and the VantageScore, as to whether it will be better, and if it’ll really do anything to improve lending," Cohn said.

"You don’t work with one credit model for decades and then adopt a new one right away. You’re going to be met with skepticism.”