Federal housing agencies to allow alternate credit scores in mortgage applications

The Trump administration on Wednesday announced new policy changes intended to help more Americans access mortgage loans, as the cost of housing continues to climb and data shows first-time homeownership rates in the U.S. remain near historic lows.

Federal Housing Finance Agency (FHFA) Director Bill Pulte and Secretary of Housing and Urban Development (HUD) Scott Turner said in a joint press conference Wednesday that their agencies would take steps to allow non-traditional credit scores to be used when considering mortgage applications, enabling tens of millions more Americans to qualify for loans previously out of reach, according to Pulte.

But such moves, long in the works, are likely to have much more limited effects than Trump officials say, experts told Scripps News, as the greatest barrier to homeownership remains the stubbornly-high cost.

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What is holding back a lot of folks from home ownership isn't the credit score, it's the price of buying a house, Chi Chi Wu, director of consumer reporting and data advocacy and acting co-director of federal advocacy at the National Consumer Law Center (NCLC), told Scripps News. Until we can get the price of housing down you're not going to get a whole wave of new home ownership.

Under current rules, nearly all lenders processing mortgage applications must consider applicants FICO credit scores, one companys rating of individuals credit worthiness that takes into account financial data like payment history, outstanding balances and credit mix to calculate a score between 300-850.

Yet many scores calculated by FICO, especially its older models, only consider payments that touch the credit system. Rent, utility payments and other transactions made via check or direct bank transfer typically dont factor into such scores, meaning some Americans who make such payments regularly but have other credit issues can be denied mortgages.

Credit history should include rental history, Pulte said. If you pay your rent for the last 10 years, that's more predictive than, you know, whether you were 21 years old and maybe didn't pay a medical bill at a local hospital.

In recent years, some companies have developed new scoring models that take into account more data sources, with the goal of providing a fuller picture of individuals creditworthiness.

Effective Wednesday, Pulte said Fannie Mae, Freddie Mac and Ginnie Mae government-sponsored enterprises (GSEs) that guarantee lenders home loans would begin to allow two such scoring models, VantageScore 4.0 and FICO 10T, in mortgage applications from approved lenders. 21 of the countrys top lenders have already been approved to accept such scores, Pulte said, with $10 million worth of loans already delivered under a trial of the new model.

The GSEs would also update their selling guides to allow more lenders to accept loans with alternate scores such that all lenders could soon begin accepting Vantage-backed scores, officials said.

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Additionally, HUDs Federal Housing Administration (FHA) would take steps to begin accepting alternate credit scores when processing loan applications for FHA-backed mortgages, Turner said. Such products are designed for homebuyers with lower credit scores or for buyers that can only afford smaller down payments.

Turner said HUD would act on that front in the next few months, but declined to provide a firmer timeline.

This historic announcement by both FHFA and the FHA will result in modernization of the mortgage industry, delivering reduced mortgage risk, reduced costs for consumers and mortgage lenders, and enhanced mortgage access for creditworthy Americans, Silvio Tavares, President and CEO of VantageScore, said in a statement following Wednesdays announcement.

Experts on housing policy, meanwhile, said the Trump administration officials were over-playing the impact of the announcement noting the number of people who might benefit by such a change is relatively small, in the tens of thousands, while incorporating rental payment data into credit scoring could come with downsides for consumers.

It's still a minority of consumers who have rent information in their credit reports, and we are very leery of adding to that, because landlords also use credit reports, and if you have negative rent information, that really harms a renter's ability to get new housing, Wu noted.

Additionally, if an individual already has poor credit, new rental and utility data is unlikely to boost them enough to qualify for a mortgage.

If someone has a negative credit history, rent payments arent going to do a whole lot, Wu added. The Trump administrations move amounts to making very marginal improvements that might help a small fraction of folks and touting it as the best thing since sliced bread.

Government data echoes that analysis. A November 2021 Government Accountability Office (GAO) study noted that while alternative data could improve or generate scores for [credit invisible or low scoring] consumers, it is unclear whether the increases would be sufficient to qualify many additional consumers for lower-cost mortgages.

Moreover, the GAO also noted that close to half (48 percent) of unscorable consumers were those under age 24 or over 65 individuals the report characterized as less likely than most to be seeking mortgage credit.

While the agencies move may enable more Americans to access mortgage loans, it also comes with added risks for the government enterprises backing them, though officials brushed aside such concerns.

We believe we've priced it and priced for the risk appropriately, Pulte said. We feel very confident that it actually hasnt increased risk, if anything, we've we think it's decreased risk with what we're doing here.

Asked whether the Trump administration backed legislation working its way through Congress to help bring down the cost of housing, Turner demurred.

The President, obviously, is involved in his administration, but I think at the end of the day that the House and the Senate have to come together, you know, with a viable solution, to bring down housing costs, he said.