Millions of would-be homebuyers who do not otherwise have credit scores -- that all-important snapshot of how they use credit -- will soon be able to generate one. They can use the latest version of a highly predictive scoring model that is still trying to find its footing in the mortgage marketplace.
Under the new VantageScore 3.0 model, predictive credit scores will reach as many as 35 million adults not covered by traditional scoring systems. That means so-called "thin file" homebuyers, who always trade in cash or have yet to establish credit, can now have a score, just like everyone else.
That's important because credit scores are the holy grail of the mortgage business. If you don't have a score, or if your score isn't high enough, many lenders don't want to touch you. If they do want to make you a loan, it will be at a somewhat higher rate.
Introduced in 2006, VantageScore was initially developed as a competitor to the better-known FICO scoring model by the nation's three major credit reporting agencies: Equifax, Experian and TransUnion.
Now an independently managed company, it is still looking for acceptance by Fannie Mae and Freddie Mac, the two quasi-government companies that purchase mortgages from primary lenders. Because the government-sponsored enterprises buy the lion's share of home loans, what they say pretty much goes. And as yet, they have declined to buy loans originated with a VantageScore.
But the latest version of the scoring program is likely to win the hearts and minds of more and more lenders, and that should put more pressure on Fannie and Freddie to loosen up.
Roughly one out of every three lenders receives applications from otherwise unscorable borrowers. When that happens, the borrower typically ends up in one of two buckets: high-risk or additional cost. Either way, the chances of being approved narrow significantly.
"Tens of millions of consumers are excluded from traditional scoring methodologies," says Barrett Burns, president of VantageScore Solutions. "Many of these consumers are not high-risk, but they are invisible to lenders who are having trouble effectively assessing their risk profiles."
According to research by Experian, typical unscorable consumers fall into prime credit tiers and hold professional or skilled-labor jobs. "This profile surprised us," says Burns. "They are not necessarily unemployed or downtrodden."
Another surprising fact: A significant number of unscorables -- about 41 percent -- own their homes, many free and clear. Typically, they've already paid off their mortgages. A good number are retired.
A significant number of unscorables are folks who always use cash. "Lots of people live on a cash basis," says Burns. "First- and second-generation Hispanics, for example, (are sometimes) distrustful of the banking environment. We didn't realize how many minorities don't use credit. Yet, they are penalized for being independent."
Of all the people who fall into the unscorable category, recent college graduates and young borrowers with thin files -- little or no credit activity -- are the hardest to reach. Nearly all are future homebuyers, and nearly all are difficult to score.
To rate these and other would-be borrowers, VantageScore will build a score for someone as soon as they start using credit. FICO won't report a score until the file contains six months' credit use. But VantageScore will create a score for a divorced person, immigrant or recent college graduate when they make their first car or credit card payment.
In another "analytic breakthrough" for infrequent credit users, VantageScore also now accepts older credit file information, which it says is almost as predictive of how the applicant handles credit as more frequent data. Typically, if there is no activity in someone's credit file within the previous six months, no score is generated. But "we look back 24 months and it's still high predictive," says Burns.
In addition, VantageScore now uses rent, utility and mobile phone payments in building its score -- when they are part of your credit records. These payments aren't reported to the credit bureaus to any significant extent, says Burns, but when they are, they again are highly predictive.
Another big improvement, and one many segments of the mortgage business have been howling for: Paid collections -- payments made through third-party collection agencies -- will not be included when generating a VantageScore.
Many people believe that as long as they are paying, even through a collection agency, it should count in their favor. But every time a payment is made, it becomes a brand-new delinquency in the eyes of the traditional credit score. Under the new VantageScore model, though, as long as you are paying a collection account on a regular basis, it won't count against you.
"We've proven that you get no mathematically predictable lift" with paid collections, says Burns.
Also, if you are behind on your medical bills, it won't count against you as long as the charges are still coming from your medical provider. But if your account is turned over to a collection agency, it falls into the above bucket.
To make it easier for borrowers to figure out why they didn't score higher, VantageScore has reduced the number of explanatory "reason codes" to 80 and rewritten them in plain English.
Finally, in a nod to FICO -- and to make its score more user-friendly -- the new VantageScore model rates people on a numerical scale from 300 to 850, the same as the competition.