What to know about VantageScore 4.0, the alternative to FICO 

A credit scoring system that could rival FICO is arriving at an important moment for first-time homebuyers — particularly those with a shallow credit history. 

VantageScore 4.0 provides a new option for lenders to evaluate the creditworthiness of a home loan applicant. The model became widely available following approvals by the Federal Housing Finance Agency, which recently announced that government-sponsored enterprises Fannie Mae and Freddie Mac are now accepting mortgage credit scores via VantageScore 4.0. 

Widespread adoption won't happen all at once

Change comes slowly in the lending industry, so VantageScore 4.0 adoption will take time, according to Melissa Cohn, regional vice president of William Raveis Mortgage.

Part of the delay has to do with the underwriting risk involved with using a new product. One concern is over the loan's future. If a loan secured using a VantageScore 4.0 credit score is later sold to someone else, will that score be challenged? Is that loan's risk level the same as that of a mortgage that was secured with a FICO score?

"People have to get comfortable with it. They need to have a history with it," Cohn said.

Large companies like Rocket have used VantageScore 4.0 to run credit checks since the spring. On the mortgages originated via the new model, the score is on average around 11 points higher than the Classic FICO, the firm recently told The Wall Street Journal. "What that meant, in the most simplest terms, was that the vast majority of people got the same price or a slightly better price by using VantageScore," Bill Banfield, chief business officer at Rocket, told the paper.

If this becomes a trend, it could make a big difference for buyers struggling to qualify for certain loan amounts. With 30-year mortgage rates now in the 7.5% range, even a slight break on the interest rate could change whether a family can afford monthly mortgage payments.

"The goal of the VantageScore is to help increase homeownership in the country," Cohn said. "But it's not going to change the way lenders underwrite income or underwrite assets. If they still see late payments, that's still going to be problematic."

This new credit scoring model won't create the kinds of problems that contributed to the Great Recession, Cohn said, noting that period was marked by relaxed lending standards, less documentation requirements and lower income verification checks. "The floodgates are not going to open … with a higher credit score on the Vantage system."

Similarities, differences between VantageScore, FICO

Perhaps the biggest difference between the two scoring systems is credit history. FICO requires at least six months, while VantageScore requires just one. VantageScore can also factor in rent and utility payments — an ability that Cohn said is helpful for first-time buyers and those who don't use much credit.

Both FICO and VantageScore use the same score range of 300 to 850 and have similar ways of evaluating payment history and credit utilization.

What real estate agents should keep in mind

With home financing questions often surfacing during initial conversations with prospective buyers, Cohn said agents should remember that this second credit scoring system could in some situations help their client get a better rate.

"But they have to make sure that they're working with a lender that will accept the VantageScore," Cohn said.

It's also important for an agent to check with their client to assess whether the selected score improves their interest rate or cash needed to close, and whether the client's pre-approval offer reflects the selected score. An agent should confirm these details before their client makes an offer on a home.