Have you heard…
There is a new credit scoring model called the FICO Score 10.
OK, so what is the new FICO Score 10 and how will it affect me and my ability to buy a home?
First, let’s take a look at the old FICO Score 9 model. Then we will look at the new FICO Score 10 model and how they are different.
And, as if FICO scoring models were not already confusing enough, there is also an UltraFICO scoring model. So we will go over that FICO scoring model as well.
Lastly, you’ve probably seen the commercials from Experian about what they are calling their Experian Boost, which is just another way to boost your credit score. So we will go over this credit scoring model also, as well as a few others. Then we will discuss how the new credit scoring model could affect buying a home.
Are you ready?
Let’s get started.
What Is the FICO Score 9 Credit Scoring Model?
The FICO Score 9 credit scoring model is fairly new (2014); however, the Fair Isaac Corporation (FICO) is already getting ready to roll out an even newer model, the FICO Score 10, which we will talk about in a moment.
The FICO Score 9 credit scoring model is similar to the older models with a few new changes.
- Medical debt carries less weight than other debt.
- Paid collections are disregarded.
- Rental payments are now reported and included as part of the overall score.
Now let’s talk about the FICO 10 credit scoring model and how it differs from the FICO Score 9 credit scoring model.
What Is the FICO Score 10 Credit Scoring Model?
The newest FICO credit scoring model is scheduled to begin in the summer of 2020. This new credit scoring suite will include the FICO Score 10 and the FICO Score 10T, which we’ll talk about in a moment.
The FICO Score 10 will be good for many and not so good for others. This FICO scoring model will use consumers’ debt levels to determine an overall credit score. Consumers with recent delinquency and/or with high credit utilization, their scores could drop 20 points or more. Additionally, personal loans are seen as being riskier than others. So if you apply for personal, unsecured loans, these could lower your credit score as well.
On the flip side, consumers who already have good credit, consistently pay down their debt, and continue to make their payments on time, will see higher scores than before.
To sum it all up—consumers with good credit will now score higher with the FICO Score 10 and those who are a higher risk will now score lower than before.
So how will the FICO Score 10 credit scoring model affect buying a home?
Keep reading, because we are going to talk about that in a moment, but first, we’re going to go over the FICO Score 10T and a few of the other credit scoring models that are currently being used.
Are the FICO Score 10 and 10T the Same Thing?
No. The FICO Score 10 and 10T are part of the same scoring suite, but they are different in how they score your credit information.
FICO Score 10T uses trended data from all credit bureaus to determine your credit score. For example, your history of credit use such as account balances and payment history for the previous year will weigh more heavily. This will show a consumer’s behavioral trends to see if they are carrying or paying off their balances each month. Additionally, temporary spending such as large amounts of money spent on vacations or holidays won’t lower your credit score as much as they did in the past if you keep your credit utilization low.
Another goal of the FICO 10T is to put more weight on personal loans. This is to penalize people who obtain a personal loan to consolidate their debt so they can use that newly freed up credit to incur more debt.
What Is the UltraFICO Credit Scoring Model?
The UltraFICO credit scoring model looks at the banking activity from your checking and savings accounts to boost your FICO score. That means if you have a low FICO score or no score at all, the UltraFICO option will give you the opportunity to increase your score. This scoring model shows a more accurate picture of stable financial behavior that doesn’t typically show up on your credit report. The UltraFICO shows how long your accounts have been open, your recent bank transactions and how frequent they are, how much cash you typically keep on hand, and your history of positive account balances.
What Is a VantageScore?
Some lenders use what’s called a VantageScore rather than a FICO score. This scoring model came out in 2006 and has been updated several times since. The VantageScore was a joint venture between the three major credit bureaus and the latest version now looks at trended credit data as part of its scoring factors. A person’s VantageScore is influenced by payment history, credit utilization, age of credit accounts, account types, and credit inquiries.
The VantageScore will be the most helpful to those who haven’t had any updates to their credit report in six months. It also ignores all paid collections, collections under $250, and ignores accounts negatively impacted by a natural disaster.
How Do the VantageScore and FICO Scores Differ?
The FICO and VantageScore models are very similar, they just use a slightly different criteria to calculate their scores. The main difference is that the VantageScore model determines one single score based on the information found in all three of the major credit bureaus. Whereas, a FICO score uses one bureau-specific scoring model. Both models now use a credit score range of 300-850; however, that wasn’t always the case. Additionally, the FICO scoring model also offers industry-specific credit scores ranges from 250-900.
What Is Experian Boost and How Does It Work?
Experian Boost offers to instantly increase your credit score by giving you credit for paying your monthly bills such as your energy, phone, cable, and internet bills on time. Traditionally, these were not factored into your credit score. However, now, if you give Experian permission to connect to the online bank accounts you use to pay those bills, you will immediately receive an updated credit score. This is great for helping those who have a low credit score and helps those with no credit history to build one.
What Version of FICO Do the Mortgage Companies Use?
You would think lenders would use the most current FICO scoring models for their mortgage approvals; however, you might be surprised to learn that this is not usually the case. Most mortgage lenders use much older versions of the FICO credit scoring models to determine creditworthiness.
Here are the most popular scoring models and terms most frequently used.
- Equifax Credit Bureau – FICO Version 5, also known as the Equifax Beacon 5.0
- Experian Credit Bureau – FICO Version 2, also known as the Experian/Fair Isaac Risk Model V2SM
- TransUnion Credit Bureau – FICO Version 4, also known as TransUnion FICO Risk Score, Classic 04
So even though FICO periodically changes its credit scoring model, lenders still continue to use much older versions for approving their mortgage applications.
Therefore, since you can’t attempt to boost your credit score by following the latest credit scoring model, the best thing to do is to be consistent with how you utilize and manage your credit.
How Can I Boost My FICO Score?
Here are some things you can do to boost your FICO score if you do them consistently.
- Pay all your bills on time.
- Lower your credit utilization. Try to use less than 30% of your available credit.
- Check your credit reports regularly while disputing errors and having them corrected and removed.
- Avoid applying for new credit cards and personal loans.
- Consistently pay down your debts.
- Pay off your credit balances each month.
- Pay off old debts whenever possible.
What Actions Hurt My FICO Score?
Doing any of the following could potentially lower your FICO score.
- Missing and late payments.
- Opening new credit.
- Increasing revolving debt.
- Maxing out your credit card(s).
- Debt settlement.
- Debts sent to collections.
What Is a Good Credit Score for Buying a House?
Your credit score is one of the most important factors a lender will use when looking at your mortgage application. The higher your credit score is, the lower your interest rate will be. Even a half of a point in interest will make a big impact on your monthly mortgage payments over the life of your loan, which is typically 30 years.
Most mortgage lenders use the FICO credit scoring model rather than the VantageScore model.
Here are the credit score ranges and where they fall on a scale of 300-850.
- 800-850 is exceptional
- 740-799 is very good
- 670-739 is good
- 580-669 is fair
- 300-579 is very poor
In addition to looking at your credit score, each lender will have their own criteria for approving your mortgage application.
Here are the minimum FICO scores the different lenders require for buying a house.
- FHA – 580+ (500-579 is possible, but not likely)
- VA – 620+ with some only requiring 580
- USDA – 640+
- FHA 203K – 620+
- Conventional – 620+
FHA loans have the lowest credit score requirement. These require a minimum credit score of 500 and will require that you put at least 10% down. However, getting approved for a home loan with such a low credit score is extremely difficult.
If you have a credit score of 580 or higher, you might only need to put 3.5% down and will have an easier time getting your mortgage application approved.
How Will the New FICO 10 Credit Scoring Model Affect Buying a Home?
The best way to achieving and maintaining a high credit score regardless of the scoring model being used at the time is consistency. Consistency in paying your bills on time, keeping your credit utilization low, and avoiding applying for too many personal loans.
If you want to buy a home, start doing all these things now so you can begin to show a consistent, responsible pattern of credit use so it won’t matter which scoring model is in place when you’re ready to buy.
However, with that being said, even though most lenders are still using the older FICO credit scoring models, it doesn’t mean they won’t also look at some of the newer data points as well. It’s also possible that mortgage lenders could change the FICO scoring models they use at any time. If they do, the new FICO 10 credit scoring model will mean there will be a bigger gap between buyers with good credit and those with bad credit.
The Bottom Line
So…will the new FICO Score 10 model affect my ability to buy a home? Well, the answer is—it depends. Meaning, it will depend on which FICO scoring model your particular lender is using. Therefore, we recommend you don’t worry so much about the different credit scoring models as you do working on responsibly using, building, and maintaining your credit.
If you want more information about how your credit will affect buying a home, help with how to improve your credit enough to qualify for buying a home, or any other home-buying related issue, please Contact Us today.
The Lakeland Real Estate Group specializes in helping buyers find the best possible home that meets their wants, needs, and budget. Homes that buyers are able to make cherished memories that will last a lifetime.
Don’t forget to request a free copy of our Buyer’s Guide to help get you started.
Additional Credit Score Resources
- Understanding Your Credit Report – Tips to Improve Bad Credit Score – Eileen Anderson
- Can I buy a house with bad credit – Glenn Shelhamer
- How to get a free Credit Report – Bill Gassett
- How to boost your Credit Score prior to applying for a mortgage loan – Paul Sian
About the author: The above real estate article “Will the New FICO Score 10 Model Affect Buying A Home?” was written by Petra Norris of Lakeland Real Estate Group, Inc. With over 20 years of combined experience of selling or buying, we would love to share our knowledge and expertise. Petra can be reached via email at firstname.lastname@example.org or by phone at 863-712-4207