Why this article is important: Lenders and MLOs now have more Enterprise-approved options for qualifying homebuyers with thin credit histories.

Guarantors for the mortgage market

Fannie Mae and Freddie Mac (Government-Sponsored Enterprises) perform an integral function in the mortgage market, serving as guarantors. They purchase mortgages from lenders and package these mortgages into mortgage-backed securities — bonds — to sell to investors. The system encourages a continuous flow of money in the mortgage market, the goal being increased access to homeownership — for qualified buyers.

To ensure homebuyers are qualified to repay, the Enterprises require the mortgages they purchase meet various underwriting requirements, including credit score thresholds.

Since the mid-1990s, the Enterprises have relied solely on the FICO score model. When a FICO score was unavailable due to insufficient credit history, the lender was required to complete manual underwriting.

Unlike mortgages approved through automatic underwriting, mortgages subject to manual underwriting are riskier for lenders to originate, since the Enterprises are not as likely to purchase these types of mortgages.

When selling a mortgage to the Enterprises, lenders now have the option to submit either the VantageScore or the FICO score to Fannie Mae/Freddie Mac (only one type of score per mortgage). Lenders do not need to commit to one or the other — they may choose to submit some mortgages with VantageScores and other mortgages with FICO scores.

Related article:

What buyer- and tenant-clients need to know about credit reports

How VantageScore differs

While different from a Tri-merge credit report, VantageScore was developed by the three main credit reporting bureaus (Equifax, Experian and TransUnion).

The main difference: VantageScore can use a smaller amount of credit history to generate a score based on a predictive model.

VantageScore forecasts the Enterprises’ new acceptance of their credit score model will result in five million more homeowners across the U.S., many living in rural areas.

Further, VantageScore claims to be more predictive of future default than FICO, as VantageScore models are updated continuously as consumer habits change.

VantageScore uses credit background for consumers not typically included in FICO scores, including:

  • credit accounts with less than six months’ history;
  • consumers who haven’t accessed credit in over six months; and
  • consumers who lack traditional credit accounts but have a history of lease, phone and utility payments.

Landlords report rental payments to credit agencies

For VantageScore to measure rental payment history, landlords and creditors need to first report these payments to credit reporting agencies. This process can be cumbersome and unreliable for applicants seeking a mortgage, making non-traditional credit difficult to actually use in scoring.

In California, residential landlords are mandated to offer tenants the right to have their positive rental payment information reported to at least one nationwide consumer credit reporting agency. Notice of the offer is handed to the tenant when entering into a rental or lease agreement and again delivered annually during the tenant’s occupancy. [See RPI Form 550 and 551]

The reporting of the tenant’s payment information offered to tenants is limited to timely rental payment performance by the tenant. A landlord electing to report late or missing rental payments to a credit agency may not recover their costs of the negative report. [Calif. Civil Code §§1954.07(b)]

Exemptions exist for small landlords to avoid the mandated offer to report positive credit information, including:

  • multi-family developments receiving government assistance; and
  • a property containing 15 or fewer units, unless the landlord is a:
    • real estate investment trust (REIT);
    • corporation; or
    • limited liability company (LLC) in which at least one member is a corporation; and
    • the entity owns more than one residential rental building regardless of the number of units. [CC §§1954.07(j)(2); 1954.07(j)]

Read more:

Mandated landlord credit-reporting offer to improve tenant credit scores