FHFA announces updated credit scoring model and removes fees for first-time homebuyers

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November, 2022

Last month, the Federal Housing Finance Agency (FHFA) made two big announcements that will benefit millions of borrowers, resulting in cost savings for nearly 1 in 5 borrowers of the Enterprises’ recent mortgage acquisitions. On October 24, 2022, FHFA announced it will reduce upfront fees for certain first-time homebuyers, low-income borrowers, and underserved communities. Separately, FHFA announced its plan to update its credit scoring model, which will consider alternative payment data, such as rent and utilities. NAHREP applauds the FHFA’s decision to reduce costs and expand access to credit for many creditworthy borrowers.

A new credit model that redefines creditworthiness

For the last two decades, FHFA has relied on the Classic FICO credit model, which does not capture payment histories such as rent, utilities, and telecom payments. The new model will require lenders to deliver both FICO 10T and VantageScore 4.0 credit scores with each loan sold to Fannie Mae and Freddie Mac (the Enterprises), improving accuracy by capturing new payment histories for borrowers when available, such as rent, utilities, and telecom payments. The implementation is expected to be a multiyear effort.

This announcement goes hand in hand with the announcement made by the Federal Housing Administration (FHA) in September, allowing first-time homebuyers to use positive rental payment history to determine eligibility for FHA mortgage products.

NAHREP applauds this shift as traditional credit scoring models can make demonstrating creditworthiness more difficult for some Latino consumers. A borrower with a poor score, or none at all, will struggle to obtain a mortgage loan or be faced with higher costs. By considering utility, telecommunication companies, and rental histories as on-time payments for credit reporting agencies, many individuals will be able to access credit for the first time.

This change is critical given how structural barriers have exacerbated credit score inequality among communities of color. Latinos, on average, rely more readily on cash than credit to pay for expenses. For example, Latinos are more likely to operate in a cash-economy, avoid debt, or save money at home as opposed to a banking institution.

Eliminating specific upfront fees to support wealth building

In a separate announcement, FHFA announced targeted changes to Fannie Mae and Freddie Mac’s guarantee fee pricing by eliminating upfront fees for certain borrowers and affordable mortgage products while implementing targeted increases for most cash-out refinance loans. Fee reductions will go into effect as soon as possible, and FHFA is working with the Enterprises to announce a date. New fees for cash-out refinance loans will begin on February 1, 2023, to minimize pipeline disruption.

Whose upfront fees will get eliminated?

FHFA is eliminating upfront fees for:

• First-time homebuyers at or below 100% of area median income (AMI) in most of the United States and below 120% of AMI in high-cost areas,
• HomeReady and Home Possible loans (Fannie Mae and Freddie Mac’s flagship affordable mortgage programs),
• HFA Advantage and HFA Preferred loans, and
• Single-family loans supporting the Duty to Serve program.

What does this mean for Latino homeownership?

Both changes, which aim to help first-time homebuyers, are important given the rising affordability challenges the market. These initiatives will be critical for Latino families in particular, who are more likely to be first-time homebuyers and rely more readily on cash instead of traditional credit. Moreover, considering that Latinos are just now entering their prime homebuying years and are projected to account for 70% of homeownership growth over the next twenty years, structural changes that expand access to credit will ensure a strong housing market and ultimately long term U.S. economic growth.