Something happened on July 8.
The Federal Housing Finance Agency announced that VantageScore 4.0 is now permitted for use on all mortgages sold to Fannie Mae and Freddie Mac, effective immediately. The significance is that VantageScore 4.0 leverages so-called alternative data to arrive at a score, opening credit opportunities for those with thin credit files.
Big changes have to start somewhere, and in the world of lending, change gets solidified when the biggest corner of the market, mortgage lending, gives its stamp of approval.
Some background on credit scores and mortgages
Thirty years ago, in 1995, Fannie Mae and Freddie Mac made an official change to the way they evaluated mortgage loans. They announced that they wanted lenders to use a FICO credit score as a gauge of assessing creditworthiness for the mortgages the quasi-government agencies would buy. At the time, most people didn't know what a FICO score was, and it was debatable whether this would have a significant impact on lending as a whole. Some people understood the implications of this change even then:
“Most mortgage lenders don’t use them routinely yet, say industry experts. But Freddie Mac’s new directive is likely to make them commonplace in the conventional, non-government loan arena.” - Kenneth Harney, Los Angeles Times, July 30th, 1995
Now, in 2025, Fannie Mae and Freddie Mac support roughly 70% of mortgages in the U.S. market and by extension, FICO credit scores have become a mainstay of every part of the mortgage lending world and beyond. A product once used by a subset of mortgage lenders, including credit unions, has expanded into auto lending, personal loans and other types of loans. In some states, employers can even pull credit scores on job applicants. So, when something happens in this part of the mortgage lending market, it's crucial to pay attention.
The impact of the FHFA announcement
According to the FHFA, the acceptance of VantageScore 4.0 and its use of alternative data will expand access to mortgage credit for historically underserved consumers, particularly younger consumers and veterans, due to specific limitations in other credit scores (e.g., not requiring recent credit activity, looking at files with less than 6 months of data).
But the more critical piece from the news is this:
“VantageScore 4.0’s innovative incorporation of alternative data sources like rent, utility and telecommunications payments results in the most predictive credit score for mortgages, according to independent research from analysts at Bank of America.”
While the use of this data via credit scores, like VantageScore 4.0, has been slipping into credit checks for a few years, the FHFA’s announcement is potentially a game-changer. For years, lenders and consumers have rightly wondered whether reporting positive payments would actually improve access to credit, because different loan products rely on different scores. And those different scores use (or ignore) different sets of data.
If lenders don't use the scores that include those payments, the logic went, why should I bother improving those scores?
With this announcement, consumers can be assured that this data could provide them with genuine access to the life-altering and largest segment of credit: mortgages.
There will be more to come on this. Still, the introduction of alternative data marks a sea-change in credit scores in the U.S. A similar announcement fundamentally changed the way lenders and consumers used credit scores 30 years ago. Yesterday's announcement will also shift the treatment of credit. Consumers and lenders must be ready for the changes that unfold.
