FHA Now Accepts VantageScore 4.0 for Loans – Here’s what it means for homebuyers

For years, borrowers seeking an FHA loan had their creditworthiness judged almost exclusively by one number: their FICO® Score. But in a long-awaited move, the Federal Housing Administration (FHA) announced lenders can now use VantageScore 4.0 when evaluating applicants.

This can be helpful for millions of Americans as VantageScore 4.0 analyzes how you manage debt over time, rather than just a snapshot of your current financial obligations. Additionally, applicants with less credit history (known as a “thin credit file”) may have more opportunities of being approved.

Here’s what you need to know about the shift, why it matters, and how it could affect your journey to homeownership.

FHA and Credit Scores: A Quick Refresher

FHA loans are government-backed mortgages designed to make buying a home more accessible, especially for first-time buyers, lower-income households, and those with smaller down payments. Borrowers can qualify with a down payment as low as 3.5%, and FHA loans often have more flexible requirements compared to conventional mortgages. However, these do come with stringent underwriting, and private mortgage insurance (PMI) is required until the borrower reaches 20% equity in the home.

Historically, FHA lenders relied heavily on FICO when assessing a borrower’s credit risk. But now, VantageScore 4.0 will open up opportunities for applicants who may not fit the FICO score model.

What Is VantageScore 4.0?

VantageScore was created in 2006 by the three major credit bureaus — Equifax, Experian, and TransUnion — as an alternative to FICO. Over time, VantageScore has evolved, with VantageScore 4.0 being its most advanced version to date.

Here are a few things that set it apart:

• Trended credit data: Instead of just looking at a snapshot of your balances and payments, VantageScore 4.0 considers how you manage credit over time. For example, steadily paying down credit card debt or student debt may be viewed more positively than a one-time drop in your balance.
• Broader scoring population: VantageScore is often able to generate scores for consumers with limited credit history. Estimates suggest that VantageScore can score 33 million more consumers than traditional FICO models.
• Same scoring range: Like FICO, VantageScore 4.0 uses a scale from 300 to 850, making it easier for borrowers and lenders to compare scores.

Why FHA’s Change Matters

Here’s why this recent FHA rule change is a positive for everyone involved:

• Access for more buyers: The more credit scorting options consumers have, the higher likelihood it is that they can be approved for the loan they desire. People who were previously “unscoreable” under FICO may now have a qualifying score with VantageScore. This includes younger adults, renters who consistently pay on time, and independent contractors.
• More accurate risk assessment: The Urban Institute said in its findings that VantageScore 4.0 is “marginally more effective at identifying high-risk borrowers from among those with the lowest credit scores.”By looking at credit behavior over time, VantageScore 4.0 may give lenders a more complete picture of a borrower’s financial responsibility.
• Potentially higher scores: The same Urban Institute study found that VantageScore 4.0 scores are higher than FICO scores, opening up the possibility of homeownership to more people.

What This Means for Homebuyers

If you’re preparing to apply for an FHA loan, here’s how the update could impact you:

• Your score might be different. It’s always wise to check your credit score to see where you stand, as well as ensure there are no potential errors weighing it down. But with VantageScore 4.0, you may be surprised to see an even higher score.
• More lenders may say yes. With FHA now allowing VantageScore 4.0, lenders can evaluate borrowers more inclusively. If your FICO Score was holding you back, your VantageScore could open the door.
• It’s still about the whole picture. While your credit score is critical, lenders will still look at other factors: your debt-to-income ratio, employment history, and ability to make a down payment.

What Future Homeowners Should Do Next

If you’re interested in becoming a homeowner and may want to use an FHA loan for its low down payment, here are a few things you can do in preparation.

• Compare your VantageScore and FICO Score. See what each file entails, and where your profile may look better when applying for an FHA mortgage.
• Strengthen your credit habits. Regardless of which scoring profile you use, the essential steps remain the same. Be sure to pay your bills on time and address any outstanding debts, such as personal loans, medical debt, and revolving accounts.
• Ask your lender questions. When you apply for a mortgage, don’t hesitate to ask which credit scoring model they’re using. Transparency can help you plan your next steps.

Bottom Line

The FHA’s decision to accept VantageScore 4.0 is a meaningful step toward expanding access to homeownership. By incorporating a new scoring model that evaluates more people, more fairly, the opportunity for homeownership for millions of Americans is now open.

Whether your credit journey is just beginning or you’ve been working hard to improve your score, knowing both your FICO and VantageScore can put you in the best position to succeed.