Mortgage applicants in 2011 may well find that their credit score is different to expectations, as new analytical algorithms are introduced into the credit scoring model. The changes which have already been introduced by the Fair Isaac Corporation will be matched by changes from Vantage Score. These will result in yet more tightening of lending procedures through enhanced underwriting, which will make it more difficult for more borrowers to obtain a mortgage loan.
Changes to the credit scoring model are a result of economic changes during the recession. Strategic mortgage defaults took lenders by surprise when borrowers simply walked away from their mortgages yet maintained other credit obligations on time. Research has shown that many who were pinpointed as having the highest credit scores have actually become more of a default risk. Across the nation consumer creditworthiness as a whole has deteriorated since 2006, the year the Vantage credit score was launched.
The chief executive of Vantage Score said that a “variety of economic scenarios, including an increase in foreclosures in the housing market and changing payment priorities amongst customers” resulted in changes being introduced. He stressed that “ongoing exhaustive research and analytic efforts are conducted on the Vantage score algorithm.” Fair Isaac has also been honing their analytics which has resulted in the new FICO 8 mortgage score.
Vantage Score has made significant moves forward and is now used by all top five credit card issuers and four of the top five financial institutes. Most use it in conjunction with the FICO score. Fair Isaac say the FICO 8 mortgage score should be 15-25% more accurate in predicting defaults. The new Vantage score is being labeled as “the new recession era credit scoring model.”
Both scores should help mortgage lenders to more accurately determine borrowers who present risk, yet may benefit those with previous bad credit that have made significant steps to improve it. Significantly, Vantage Score 2, the new model, will provide a larger data base of previously un-scored consumers as potential prime borrowers.
Vantage Score Solutions new model will increase the use of data it analyses. Previously scores were established using two years of data, and this will now increase to three years. They will also more than double the use of anonymous credit files it uses to forty five million.
The results of both Fair Isaac and Vantage Score changing their credit scoring models will make it more difficult to obtain mortgages, and thus benefit the financial institutions which have been burnt through strategic defaults. It is predicted that the changes will introduce higher mortgage interest rates and a requirement for larger down payments.