New FICO scoring model focuses on 24-month look back

What’s in your FICO score?

With mortgages in mind, your past 24 months of credit behavior, called trended data, will be front and center with the new FICO 10 and FICO 10T scoring models being released this summer.

Paying bills on time and keeping balances in check are likely going to see a gain in score. Consumers with recent delinquency or high utilization are likely going to see a downward shift (in score) and depending on the severity, and recency of the delinquency it could be significant, all according to Dave Shellenberger, vice president of FICO’s product management.

FICO 10 and FICO 10T will be more predictive, allowing lenders to extend credit to more borrowers at better rates overall, according to Joanne Gaskin, FICO’s vice president of Scores and Analytics. FICO 10T purports to reduce mortgage default rates by up to 17%.

Wow! What lender wouldn’t want this?

Why this? Why now? FICO adjusts its scoring models roughly every five years, drawing on evolving consumer behavior and patterns observed in credit bureau data, wrote Gaskin.

There may be something to Gaskin’s assertion about credit bureau data.

March 2017 and May 2018, I wrote columns about tax liens, judgments and certain medical collections being deleted because of the difficulty credit bureaus were having in accurately matching these events to the right person.

Obviously, if this uncouth credit behavior is off the grid, FICO scores would likely inflate, perhaps not showing the truest credit risk picture.

And, it could also be pressure from the Federal Housing Finance Agency, Fannie and Freddie’s conservator and regulator.

August 2019, Mark Calabria, FHFA’s director and the man who loves competition, opened the door for the possibility of credit score competition from the likes of Vantage Score (owned by credit bureaus Experian, Equifax and TransUnion).  FICO is the only scoring model that has ever been used by mortgage lenders.

A separate and important question is: Will Fannie or Freddie accept FICO 10 or the FICO 10T scoring models? Neither Fannie nor Freddie responded to that question.

“The process is just underway so it would be premature to speculate,” wrote FICO’s Gaskin.

Put your money on F & F allowing mortgage lenders to implement FICO 10T because it’s easy to fake good credit behavior over a short period of time. It’s very hard to fake consistent credit debt loads and good credit management over the most recent two years.

Since some credit risks are now opaque (judgments and the like), predictive modeling will reward folks who have demonstrated responsible behavior and punish those who have not.

When it comes to you and yours for home purchasing or refinancing, most mortgage lenders use the lowest middle FICO score for all borrowers when it comes to granting credit and loan pricing. Some lenders will use the highest middle FICO score of the highest income earner for benchmarking the approval and pricing.

A FICO credit score of 740 or better is top tier. F & F allow as low as a 620 middle FICO. FHA goes as low as a 500 FICO but requires 10% down (as opposed to the standard 3.5% down).

Mortgage lenders lean heavily on a FICO and loan-to-value matrix for mortgage pricing.

For example, if you are putting 20% down for a purchase and your credit score is 740 or higher, your mortgage will cost you 2.5% less in loan points (each point is 1% of the loan amount) compared with borrowers whose middle FICO score is only 620.

Myfico.com has helpful hints for improving your credit scores.