Comparing Classic FICO and VantageScore 4.0 in Mortgage Origination

For decades, the Classic FICO model was the primary credit scoring system lenders used to underwrite mortgages and determine the likelihood of an applicant repaying their home loan. However, a recent announcement by the Federal Housing Finance Agency (FHFA) shows that credit scoring in mortgage lending is evolving and lenders may need to adjust their processes and systems to accommodate the changes.

Fannie Mae and Freddie Mac will now officially allow lenders to qualify borrowers using the VantageScore 4.0 model, in addition to the established Classic FICO model, through the tri-merge credit report. This gives lenders a new option in mortgage origination as these government-sponsored enterprises (GSEs) purchase approximately 70% of mortgages on the secondary market. 

Although the FICO Score 10 T updated scoring model has also been approved, its full rollout will take time. Some lenders may also wait to see how the new model performs before fully transitioning from Classic FICO, especially since they can now use VantageScore 4.0 as an alternative.

In this blog, we’ll compare Classic FICO and VantageScore 4.0 to show how new scoring models may provide lenders with a more complete view of an applicant's financial profile. The goal is to help lenders approve more qualified borrowers and lower their risk of delinquencies. We'll explore the specific ways they differ and what these changes could mean for lenders.

How Do Classic FICO and VantageScore Differ in Their Scoring?

Fair Isaac Corporation, more commonly known as FICO, worked with the national credit bureaus to create the first FICO credit score in 1989. To this day, FICO is widely used by a variety of lenders for their legacy and reputation in the industry, even as new scoring models have been developed. For years, Fannie Mae and Freddie Mac required mortgage lenders to use a specific set of older FICO models (FICO 2, 4, and 5), often called Classic FICO, to assess a borrower's creditworthiness.

VantageScore is a newer model created by the three major credit bureaus (Equifax, Experian, and TransUnion). It was designed to compete with FICO and offer a more inclusive approach to credit scoring. While VantageScore has been widely used in some lending sectors, like credit cards and personal loans, it has historically been limited in the mortgage industry since only FICO models were approved by GSEs until recently. 

These two models may serve a similar purpose, but their scoring methodologies and rules differ greatly for certain criteria:

Scoring Range

While both have the same 300-850 range, VantageScore 4.0 uses terms like 'Excellent' and 'Good' across slightly different numerical thresholds than FICO's traditional scale. The two models will also weigh certain credit factors differently, which may lead to discrepancies in scoring.

Minimum Credit History

The Classic FICO scoring model requires at least six months of credit history to score an applicant. VantageScore 4.0 can score borrowers with as little credit history as a single month by using a wider data scope. As a whole, VantageScore scores 33 million more consumers than FICO. 

Trended Data

VantageScore 4.0 incorporates more trending credit data, such as payment behavior and credit utilization patterns, in its reporting than Classic FICO. However, FICO Score 10 T will also use trended data over the previous 24 months to offer more accurate insights on borrowing behavior. 

Collection Accounts

FICO is generally less forgiving of paid or unpaid collection accounts and will include medical debt in its scoring. It says this helps improve scoring predictive performance. VantageScore 4.0 ignores all paid collections and unpaid medical debt in its scoring.

Alternate Payment Data

The Classic FICO model does not account for rent, phone, and utility payment history, which may hurt first-time borrowers and others without an established history. VantageScore 4.0 will consider these alternate data points, if they are reported to the credit bureaus, to promote financial inclusion.

How Certain Borrowers May Benefit From One Scoring Model Over the Other

Given the differences listed above, it’s easy to see how adopting VantageScore in mortgage lending could open the door for borrowers who don’t fit neatly into traditional credit models. 

VantageScore is especially helpful for those with thin credit files, such as younger buyers, active and retired members of the military, or individuals rebuilding their credit. By incorporating trending data and, in some cases, alternative data like rent or utility payments, it creates more opportunities for borrowers to qualify and potentially earn higher scores.

That said, some borrowers may still benefit more from Classic FICO. Applicants with established credit histories often perform well under FICO’s scoring system, which highlights long-term stability and traditional credit use. These borrowers may score higher under FICO and qualify for better terms on their home loan. 

In practice, having both models available allows lenders to assess risk more effectively while serving a broader range of customers. 

Why the Addition of VantageScore Will Not Be an Overnight Transition

While the policy takes effect immediately, many lenders won’t be able to use VantageScore right away. This will be a complex undertaking for the entire mortgage ecosystem, which has been built around FICO for decades. National Mortgage Professional notes that some mortgage lenders and industry participants are concerned with how this transition will impact their internal processes and vendor relationships and are requesting additional guidance from FHFA and the GSEs.

Some of the concerns and questions from the industry include how mortgage lenders will need to adjust their underwriting processes and systems to accommodate VantageScore. Many mortgage lenders and their partners have worked with the same processes and systems for years that were configured for FICO. Here are some of the vendor and internal challenges that will likely impact implementation:

• Loan Origination Systems (LOS) vendors will need to ensure that their systems are configured to pull both FICO and VantageScore 4.0 and manage the nuances of their data. 

• The Automated Underwriting System (AUS) engines within the LOS must be updated to correctly interpret and make decisions based on the new scoring models. 

• Credit report providers that provide tri-merge credit reports should be able to deliver both FICO and VantageScore 4.0 models within their existing reporting framework.

• Lenders will have to train their staff of underwriters, loan officers, and risk managers on VantageScore's methodology, score ranges, and how it differs from FICO. 

• Lenders will also need to determine how the VantageScore model might affect their loan portfolios and adjust their internal credit models. 

  
  

The decision to adopt VantageScore 4.0 will rest with mortgage lenders, but it will be shaped by the capabilities of their LOS and technology partners as well as their overall business strategy and borrower focus. At Service 1st, we provide lenders with the best credit reporting solutions with industry-leading turnaround times and price options, no matter if they require FICO or VantageScore. 

Contact us today to request pricing and learn more about our merged credit reporting services for mortgage origination.