Much attention has focused on the announcement that FICO is releasing an updated credit-scoring model entitled FICO Score 9. This new algorithm, which is scheduled to be available in the fall, touts 3 primary improvements:
- Once repaid, debts that went to collection agencies won’t count against a consumer’s FICO score.
- Medical debts will have a lesser negative impact on consumer scores. The median FICO score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points.
- A better technique to determine credit creditworthiness of consumers with little credit history (often referred to as “thin files”.)
Some of these updates are likely the result of a study by the Consumer Financial Protection Bureau suggesting that consumers’ credit scores may be “overly penalized” by medical collections. It states that medical debt is unlike other forms of debt as it is often a result of insurance issues with the consumer often unaware of the debt prior to being contacted by a collection agency.
Sounds great, but here’s the catch for home buyers…
The use of credit scores for mortgage purposes is largely dictated by the GSE’s, Fannie Mae (FNMA) and Freddie MAC (FMAC.) Both entities determine which credit scores are acceptable for use by their respective automated underwriting engines. As a result, virtually all mortgage lenders use only the credit score models accepted by the GSE’s,
Since 2009, the GSE accepted scoring models have been, Equifax Beacon 5.0, Experian FICO V2, Trans Union FICO Classic 4 (formerly known as Empirica)
At present, neither FNMA nor FMAC have indicated any plans to accept the FICO Score 9 model, rendering it largely useless within the mortgage industry. A precedent for GSE inaction on credit score updates has already been established. In 2009, FICO released the 08 scoring model which despite similar media attention, was never adopted by FNMA or FMAC.
The media attention given to FICO’s Score 9 model and the failure to explain its likely non-use within the mortgage industry has created confusion for many homebuyers and mortgage lenders.