Mortgage borrowers are in for a huge change | Official Website of Louis Velazquez, entrepreneur, finance guy and tech innovator

If you’ve ever applied for a mortgage, you probably had to fill out your fair share of paperwork and hope for the best.

The reality is that mortgage lenders don’t give out home loans easily. They can’t afford to.

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When you’re lending out hundreds of thousands of dollars in a single transaction, the standards are pretty high. That’s why there’s certain criteria you need to meet as a borrower to get yourself approved.

For one thing, you need a reasonable debt-to-income ratio. Too much debt relative to your paycheck can be a huge red flag.

You also need an income that can support the loan you’re taking out — and the monthly payments you’re taking on.

Mortgage borrowers are in for a big change.

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Credit scores are a huge factor

On top of a reasonable amount of debt and income, you need to meet certain credit score requirements to qualify for a mortgage.

Your credit score tells lenders how likely you are to repay a large debt like a mortgage on time.

A history of missed or late payments will typically result in a lower credit score, making it harder to qualify for a mortgage — and understandably so. On the flip side, a great credit score could not only make it possible to get a mortgage, but qualify for a competitive interest rate.

With mortgage rates being as high as they are today, having great credit could spell the difference between being able to afford a home or not.

You might qualify for a mortgage with a lower credit score. But if you get stuck with an exorbitant interest rate because of it, it may not do you much good.

A big change is coming to mortgages

For years, FICO was the gold standard for assessing borrowers looking to take out government-backed mortgages. But on July 8, the Federal Housing Finance Agency indicated that mortgage lenders can begin using VantageScore, a rival of FICO, to assess borrowers’ creditworthiness.

“To increase competition to the Credit Score Ecosystem and consistent with President Trump’s landslide mandate to lower costs, Fannie and Freddie will allow lenders to use Vantage 4.0 Score with no current requirement to build new infrastructure,” Federal Housing Finance Agency director Bill Pulte announced in a social media post.

Pulte said this decision would not only open mortgages up to a larger pool of borrowers, but potentially result in lower closing costs across the board, as it may be more cost-effective for lenders to pull VantageScore data than to pull FICO scores.

Shares of Fair Isaac Corp (FICO) stock plunged almost 9% following the announcement.

Created in 2006, VantageScore has become an increasingly popular source of credit information, so it’s not surprising to see it gain acceptance as a means of vetting candidates for government-backed mortgages.

The announcement comes on the heels of an inquiry into mortgage-related junk fees the Consumer Financial Protection Bureau has been pursuing since 2024.

“Mortgage lenders have shared that costs for credit reports and scores have increased, sometimes by 400% since 2022,” said former CFPB Chairman Rohit Chopra last year. This change could be a positive one for mortgage borrowers as well as lenders.

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The question mark, however, is whether mortgage lenders will actually use VantageScore on a broader scale. Because FICO has long been the go-to source for consumer credit scores, there’s a good chance lenders will be slow to ditch it.