When it comes to finances, credit is a regular consideration for most households today. Whether you’re shopping with a credit card, paying in installments on a large purchase, or making loan payments for a car, purchasing on credit is a major factor in how we afford the lives we lead and manage our funds. In particular, home mortgages are a major source of credit in this country, consisting of millions of loans, many worth hundreds of thousands of dollars. For that reason, when applying for a home mortgage, your credit score is a major factor in not only being approved, but it also impacts the interest rate you can receive.
In 2025, a new credit scoring model will be put in use by lenders to help these financial institutions better determine the creditworthiness of potential homebuyers. Fannie Mae and Freddie Mac will adopt the new FICO Score 10T and VantageScore 4.0. For interested home buyers, these changes could impact your ability to purchase. While other lenders may continue to use other FICO Score models, which calculate your credit rating differently, it is likely that these newer standards will receive further widespread adoption as time goes on. It’s best to understand the differences.
All credit rating models consider a wide variety of factors, from your current debts, the number of accounts you have, and your payment history on credited accounts, to help lenders better understand how trustworthy you are in repaying certain loans. FICO breaks it down like this: Payment history (35%), Credit utilization (30%), and Credit age (15%), Credit mix (10%), new credit (10%). For a home mortgage covering a large sum of money, it is especially important for you to be reliable. The new FICO 10T rating score is not dissimilar to older FICO calculations, but does extend to a 24-month look at your credit history. In particular, missing payments will become even more detrimental to your credit score, as two years of missed payments can add up very quickly.
These scores aim to be more inclusive and to show a fuller picture than the old FICO scores did. If you want to improve your new 10T score, you may need to try a few new methods. Additionally, these scores also consider alternative credit data, as well as the traditionally reported credit cards and car payments. For example, VantageScore 4.0 allows borrowers to add on-time payments for rent, utilities, and telecom bills. For those with limited debt or who prefer to use cash, this is a big advantage when seeking credit. The introduction of these new credit scoring models offers more opportunity and accessibility to credit for more individuals. This is particularly true for those with limited credit history or strong alternative credit data.
Additionally, the VantageScore 4.0 only requires one month of credit history to generate a score, while FICO 10T still requires at least six months. Overall, the launch of these credit scores is a significant step towards hopefully allowing access to homeownership to more Americans. By considering alternative credit, these scores may provide lenders a truer picture of the ability of a potential homebuyer to pay their loan and extend credit to those previously unable to qualify.
With new, trustworthy buyers taking loans, lenders may be willing to extend better conditions as the risk of defaults decreases over time. This new system stands to help both buyers and lenders towards a more financially stable future.