Fannie Mae and Freddie Mac Will Price Mortgages the Same Whether Lenders Use FICO or VantageScore

A change in how mortgage fees are set could shake up the credit score used when you apply for a home loan.

The agency that oversees Fannie Mae and Freddie Mac announced a change on Monday, September 28, that could affect how millions of home loans are priced. Bill Pulte, director of the Federal Housing Finance Agency (FHFA), said the two mortgage giants will move to a single pricing grid that treats VantageScore 4.0 credit scores the same way as Classic FICO scores.

"Instead of two separate pricing grids, which makes zero sense, Fannie and Freddie are hereby moving to ONE PRICING GRID with VantageScore joining the existing FICO Classic pricing grid," Pulte wrote in a social media post.

What Fannie Mae and Freddie Mac do

Fannie Mae and Freddie Mac do not lend money to home buyers directly. Instead, they buy mortgages from lenders, which frees up those lenders to make more loans. According to Yahoo Finance, they support about 70% of the U.S. mortgage market. Because of that, the rules they set shape how most conventional home loans work.

What a pricing grid is and what changed

When you get a mortgage that Fannie or Freddie will buy, your lender uses a chart, called a pricing grid, to figure out certain upfront fees. These fees are known as loan-level price adjustments (LLPAs). They depend on things like your credit score and your down payment. A lower score often means higher fees, which can show up as a higher interest rate or more closing costs.

Lenders approved by Fannie and Freddie can already use either Classic FICO or VantageScore 4.0 for eligible conventional loans, according to HousingWire. But HousingWire reported that VantageScore 4.0 scores were subject to a 20-point downward adjustment to account for differences between the two models. The new single grid removes that difference.

A few details are still unclear or limited:

• Timing: According to Bloomberg Law and Investing.com, the FHFA did not say when the new single grid will take effect.
• Not every loan: HousingWire reported that Classic FICO is still required for manually underwritten loans, which are loans reviewed by a person rather than an automated system.
• Savings are an estimate: Tony Hutchinson of VantageScore told HousingWire the company expects "nearly $1 billion in savings in the next 12 months alone." That is the company's own estimate, not an official figure.

Why investors reacted

The news hit shares of Fair Isaac, the company behind FICO scores. Its stock fell more than 20% shortly after the market opened on Tuesday, according to Yahoo Finance, and HousingWire reported the drop topped 26% by Tuesday afternoon. VantageScore was created by the three major credit bureaus, Equifax, Experian and TransUnion. Rocket Mortgage CEO Jay Bray also said his company would adopt VantageScore, according to Yahoo Finance.

Supporters say more competition between score makers could lower costs and help more people qualify. It is too early to know how much, if anything, individual borrowers will save.

What this means for your wallet

If you are planning to buy a home or refinance, here is what may be useful to know:

• You have more than one credit score. Different companies use different formulas, so your FICO and VantageScore numbers may not match. Many banks and card companies show one of them for free.
• Ask your lender which score they use. As lenders adopt the new rules, it may be worth asking how your score is being pulled and priced.
• The basics still matter most. Both scoring models reward paying bills on time and keeping credit card balances low compared with your limits.
• Check your credit reports. You can get free credit reports from the three bureaus at AnnualCreditReport.com and dispute any errors you find.