Credit scoring changes expand mortgage access but don’t guarantee loans

New credit scoring models being rolled out across the mortgage industry could dramatically increase the number of Americans getting a credit score — but experts warn that borrowers shouldn’t confuse the number on paper with actual loan approval.

As Micah Smith, a credit repair specialist, said, “People with poor credit files…may be able to see the score…but that doesn’t necessarily mean they’ll be approved for a mortgage.”

“It actually turns out that about 33 million more people will actually get a result with these newer models, which have not been approved,” she explained.

A few months ago, the VantageScore 4.0 model entered the mortgage market, competing directly with the FICO 10T. The algorithms represent two updated credit formulas approved by federal regulators for future mortgage use, each designed to paint a more detailed picture of a borrower’s financial habits.

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The FICO 10T includes “trend data,” meaning it looks back over time to see how consumers manage balances and payments rather than capturing just one moment on a credit report. Meanwhile, VantageScore 4.0 expands the types of information that can be counted toward a score — which is why it’s expected to generate scores for millions of Americans who previously had thin or incomplete credit files.

While both models modernize the system in different ways, it is lenders – not consumers – who will ultimately decide which algorithm they rely on when evaluating a mortgage application.

“You won’t have the ability to choose between the two. So it will be up to the discretion of the lender as to which algorithm they actually use,” Smith said. “And so the biggest thing we want people to focus on is … just staying with the basics and focusing on what has consistently, in the past, built a good credit score.”

If someone’s score drops under a new algorithm, Smith offered a three-step triage plan, including daily habits that can improve credit over six months to a year.

“Three tips you can easily utilize to make sure your scores jump to higher levels: First, we want to study your credit report and look for errors,” she also advised. “Reducing balances on credit cards will always move the needle… [and] What we ask people not to do is not to rush and make an irrational decision. Don’t chase trends and don’t look for gimmicks.”

Smith noted that fellow industry professionals have expressed concerns that a potential shift toward a “very lenient” VantageScore 4.0 model could lead to a housing crisis similar to the one that fueled the Great Recession.

“The guardrails are in place now because we learned from 2008 and 2009. And so, what we are seeing is that lenders are more stringent with their standards,” said the credit expert against any kind of collapse.

“When they were making these loans without documentation, and they didn’t do a thorough study of who they were making the loans to, they were selling these loans to Wall Street in 2008 and 2009, and there were no repercussions to the lender,” Smith explained.

“Now, lenders are more careful, and they’re doing their due diligence to make sure that someone can actually repay the loans. So introducing a new algorithm wouldn’t be a problem. What might be a problem is negligence, unnecessarily giving these loans to unqualified individuals…Basically, there are too many guardrails in place to cause a major collapse.”

As of Wednesday, mortgage rates are approaching sub-6% levels, with Zillow reporting its 30-year fixed interest rate at 6.04% and its 15-year fixed home loan interest rate at 5.47%.

The biggest mistake consumers make is when they hear a new registration form is coming, Smith warned, stressing the risk of “falling back” without understanding the details.

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“I think the biggest thing I want people to understand when it comes to these new enrollment models is paying attention to the narrative and who is pushing it out,” she said. “No matter how shallow the pie, there are always two sides. So don’t blame a scoring form, for example, for a potentially lackluster result. You have to understand that credit has a way of working and there are people to help you get there.”

“When you get the right result, when you start building good habits, no matter what algorithm you pull, you’ll see a better result all around. So it really comes down to habits that are timeless. Don’t put the blame on these algorithms for a lower result… everyone makes mistakes. There are risks and drawbacks to everything, but get involved in any type of program you sign up for. Sign your name on a dotted line, and make sure you know the risks.”

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